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07/13/2020 | News release | Distributed by Public on 07/13/2020 08:14

CLO Market Round-Up: Leveraged Loan Defaults on the Rise; AMC May Avert Bankruptcy

In our weekly round-up, we recapTreppWirestories that highlight noteworthy news about companies with positions in the CLO universe. Last week, the headlines revolved around the rise in leveraged loan defaults, a movie theater chain potentially averting bankruptcy, a retailer filing for bankruptcy, and more. We also analyze CLO risk and performance.

If you are interested in seeing stories in your inbox daily, reach out to us here. Trepp was recently named a category leader in the Chartis RiskTech Quadrant®for CLO Solutions 2020, which evaluated 13 CLO offerings in the market.

The loans below faced the largest movement in their prices from the week before. You can find Trepp's full list, along with the managers with the largest exposure to each loan, in our product.

Read below for an overview of the noteworthy stories that we reported on last week and see how these developments might impact leveraged loan prices.

Leveraged Loan Defaults On The Rise

According to S&P Global Ratings, US leveraged loan defaults rose to a record high of $23 billion in the second quarter of 2020 across 27 index issuers. This was the highest quarterly volume since the first quarter of 2009, during the last financial crisis. The volume of defaults in May was $10.54 billion, which was followed by $5.70 billion in June.

These statistics would not come as a surprise to our readers who have seen our coverage on credit downgrades and firm bankruptcies that took place over the past few months.

According to the report, these defaults have mostly been driven by pre-pandemic situations which were exacerbated by the COVID-19 crisis. For instance, firms including Hertz Global Holdings Inc., Cirque du Soleil Inc., 24 Hour Fitness, Fieldwood Energy, Technicolor, CEC Entertainmentand Covia that have recently filed for bankruptcy all had credit ratings of 'B' or 'BB' before the outbreak.

As per the Trepp CLO database, roughly 1.37% of leveraged loans that serve as a collateral for US CLO vehicles have defaulted.

AMC May Avert Bankruptcy

We have written about the woes of theater chain AMC several times in recent months. The firm was forced to close due to the social distancing guidelines and have yet to reopen (a July 30 timeline appears to be the timeline for reopening).

The company retained law firm Gibson, Dunn & Crutcher LLP to advise on potential restructuring options in early April. Subsequently, there was chatter about Amazon possibly acquiringthe company in May. Things recently took a turn, however, with the Wall Street Journalreporting that the firm is close to finalizing a restructuring deal that would help it avert a near-term bankruptcy.

The deal would require bondholders to provide a $200 million senior loan and to swap their unsecured claims at a discount for new, second-lien debt. AMC refused a competing financing offer from Apollo Global Management Inc. The AMC deal is another example of how PE firms and asset managers have been competing to make profitable transactions in an effort to protect their investments. (Similar conflicts between investors of recently bankrupt firms like Serta Simmons Bedding were reported on during the pandemic disruption. Read more here.)

AMC is represented in the Trepp CLO databasewith the $2.0 billion AMC Entertainment Holdings - Term Loan B loanwhich was priced at L+300 and matures in April 2026. The loan was held by roughly 200 CLO vehicles in May or about 18% of all the deals in Trepp's database.

In terms of trading levels, the loan was heavily-acquired in late February according to Trepp data at handles of $96 and $97 and was then subject to another wave of buying between March 5 and March 9 at prices between $88 and $91. The timing of these trades was unfortunate for many CLO managers as the credit tumbled to as low as the mid-$60s in late March.

There was a race for the exits in early April which continued well into may according to trade data accumulated by Trepp. There were about 230 sell trades executed in April to early May in the range of $72-$79. We have seen a few more sell trades in early-June in the high-$70s but the price has since declined and the credit was quoted in the high-$60s this week by IHS Markit. It remains to be seen if the buying activity will resume now that the company seems to be in the clear.

Healthcare Company Successfully Refinances

Georgia-based healthcare company Immucor, which provides transfusion and transplant diagnostics, announced this week that the company recently refinanced its capital structure. The details mention that the transaction consists of a new revolving credit facility, first-lien term loan, and second-lien term loan, with additional support from existing majority shareholder TPG Capital. The newly issued debt instruments mature in 2025.

The company is represented in the Trepp CLO databasewith the $657 million Immucor - Term Loan B3(L+500) which is due in June 2021. It was held by 36 CLO vehicles in April but by only 21 CLO vehicles in May (or roughly 2% of all the deals in the Trepp database).

The credit was trading at or around par in 2019 up until March of this year. It plunged to the low-$80s in late March which led to a large wave of selling in April in the range of $83-$89. Most of the selling was completed by one manager that had significantly reduced its holdings. Interestingly, the quoted price has only gone higher since then with IHS Markit quoting the credit in the high-$90s this week. One manager made a profitable trade (on paper) in late April and purchased approximately $2.5 million of the credit in the high $80s prior to its recent price increase.

Another Retailer in Distress; Ascena Retail Group to File for Bankruptcy Soon

In mid-June, we noted that Ascena Retail Group - the owner of Ann Taylor and other brands - hired law firm Kirkland & Ellis and others to 'explore balance sheet alternatives.' According to a Bloomberg report, the firm is now one day closer to seeking Chapter 11 as a filing is expected to come as soon as this week.

The bankruptcy plan would reduce the firm's $1.1 billion debt load by $700 million and also hands over control of the company to lenders including Eaton Vance Corporation and others. The firm is planning to close 1,200 of its 3,000 stores in the US.

The company is the latest to join the list of battered retailers as sales declined from store closures during the pandemic.

Ascena is currently represented in the CLO market with the $1.8 billion Ascena Retail Group Inc - Term Loan B (L+450; due August 2022). It was held by roughly 170 CLO vehicles in May or about 15% of all deals in the Trepp CLO database. The credit was traded in the $60s in mid-2019 and saw its quoted price decline to the low-$50s until last November. The credit generated a number of sell transactions in the $60-range in January but its price plunged to the low-$20s in late May due to COVID-related store closures.

The credit since recouped some of its value and was quoted in the mid-$30s last week by IHS Markit. Surprisingly, the credit has only been listed in one sell transaction since mid-March.

Delta Airlines Amends its RCF As Revenues Fall

MarketWatch reported that Delta Airlines has amended its $2.65 billion revolving credit line to extend and turn it into secured debt, as noted in a filing.

The amended revolving-credit facility is now secured by liens on certain routes and other related assets. The new terms include the option to pledge aircraft, among other assets, as additional collateral. This move comes after the firm said that it expects its second quarter 2020 revenue to decline by 90% compared to a year ago.

Thefirm is represented in the CLO market with therecently launched $1.5 billionDelta Air Lines - Term Loan B (4/20) which was priced at L+475 and is due April 2023. According to Refinitiv PLC, Delta Airlines was the first company with a 'BB' or better rating to enter the syndicated loan market since the end of February.

The credit was held by over 320 CLO vehicles in May or almost 30% of all the CLO deals in theTrepp CLO database. It has been aggressively bought since it was issued in late April but has also seen a number of 'sell' trades. All the trading has been in the range of $96-$100, according to IHS Markit.

First European Leveraged Loan Priced Since Outbreak; MásMóvil to go Private

In mid-June, we wrote a story about PE firm KKR and others making a €3.0 billion bid to take Spanish telecom company MásMóvil private. Reuters reported that Morgan Stanley, Barclays, and BNP Paribas were raising €3.5 billion in financing for the leveraged buyout, which was to include €1.5 billion in leveraged loans.

Reutersrecently reported that the group of PE firms secured a €2.0 billion leveraged loan for the buyout, €500 million more than initially targeted. The seven-year loan is the first leveraged loan to price since the COVID crisis began. The deal was oversubscribed according to the article.

The firm is represented in the CLO market with the €1.45 billion MasMovil Ibercom - Masmovil Cov-Lite B2 New Term Loanwhich priced at E+262 and matures in mid-2026. The credit was raised in 2019 and was the first European issuer to include an environmental, social and governance component to a leveraged loan package, according to S&P Ratings.

Analyzing CLO Risk and Performance (January 2020 to May 2020)

While conversations about CLOs primarily focused on the growing size of the market, it has now shifted to the substantial financial stress faced by a large number of corporations whose leveraged loans have been broadly syndicated in the CLO market.

CLOs are structured to be highly diversified by issuer and sector. However, the pandemic has reduced the effectiveness of this diversification with its broad-ranging impact across industries. With a large number of industries such tourism, entertainment, energy and service industries battered as a result of the pandemic, companies across the board are seeing increasing financial strain in both their top line results and EBITDA. This has led to a reduction in the credit quality of the leveraged loans for these companies as well as substantial leveraged corporate credit downgrades by rating agencies in recent months. In many cases, these credit downgrades were subsequently followed by bankruptcy filings.

In June alone, Trepp covered bankruptcy-related news for more than 10 firms which have a presence in the CLO market. In the current climate, CLO investors face more risk in the CLO notes they own. The Trepp CLO database shows that roughly 1.23% of defaulted loans are currently held as collateral. This includes 1.37% of defaulted loans for US BSL CLO and 0.57% for EU BSL CLOs. The impact felt by the global pandemic for corporate leveraged loan borrowers has led to increased CLO test failures, primarily in the areas of CCC limits, Caa limits, weighted average rating factor (WARF), weighted average spread (WAS) and overcollateralization (OC) tests.

Below we list the change in these metrics from January to May of this year for both US and EUR BSL.

WARF: Moody's WARF test, used to measure the quality of a CLO's portfolio in rating terms by converting the rating of each asset into a numerical score, has shown a marked increase since January of this year. This has partly hampered the ability of BSL CLO managers to trade loans unless the trade improves a CLO's WARF score. There have been many CLO managers that are doing just that. The secondary market bids for higher-rated credits continue to move upwards while the market for credits rated 'B-' and 'CCC' continues to decline.

CCC Limits: CCC limit breaches have significantly grown in number with the high exposure to 'B-' and 'CCC' corporate credits. Based on the TreppCLO database, we have seen S&P CCC limits and Moody's Caa limits spiking since January (on average).

WAS: The WAS test, which gives the par-weighted average spread of the performing securities in a portfolio, is designed to prevent the accumulation of low yielding assets in the portfolio. Despite the higher credit risk in CLO portfolios and wider credit spreads, most CLO managers have not witnessed much of a benefit in WAS which has seen only a moderate uptick since January.

OC: It has been widely reported that several managers have CLO vehicles failing OC tests. The 'AAA' and 'BB' OC Cushion for both US and EUR deals have seen a reduction since January. In addition, roughly 23% of the CLO deals in the TreppCLO database are now failing interest diversion tests.

With the deterioration in collateral quality wreaking havoc on CLO tests and trading levels, the market for new CLO deals with traditional four and five-year reinvestment periods has come to a halt. Over the past 2-3 months, most of the pricing activity was seen from static CLOs and CLOs with one to two-year reinvestment.

General Pricing Data

While a number of managers are currently marketing new deals, there was no new issuance in the CLO market last week.'