US Leveraged Finance Market Analysis - February 2011

Leveraged Finance AnalysisFebruary 2011 - US MarketSteve Mil er - Managing DirectorTuesday, February 15, 2011Copyright 2011 Standard & Poor's, a division of The McGraw-Hil Companies, Inc. TextNo content (including ratings, credit-related analyses and data, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of S&P. The Content shal not be used for any unlawful or unauthorized purposes. S&P, its affiliates, and any third party providers, as well as their directors, officers, shareholders, employees or agents (col ectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. 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Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees. Tuesday, February 15, 2011The loan market in January• Technicals push loan prices higher, yields lower• Massive inflows into loan mutual funds ($4B in Jan.)• Where’s the deals? LBO activity remains scarce• Inflows + weak deal flow = dizzying market: - Loans gain 2% in January, S&P/LSTA Index reaches 3-year highTextTuesday, February 15, 2011Technicals out of whack:Cash inflows to investors dwarf M&A activity $30BM&A VolumeCLO Issuance/Prime Fund Inflows and Repayments$23B$15BText$8B$0B1/102/103/104/105/106/107/108/109/10 10/10 11/10 12/10 1/11Source: LCD - Leveraged Commentary & DataTuesday, February 15, 2011Average price, loan flow names, since 20109998.29 on Feb. 1096outro93901/103/105/107/109/1012/102/10/11Source: LCD - Leveraged Commentary & DataTuesday, February 15, 2011Issuers in command: Reverse-flexes rule, yields dive50%8.0%Flex DownNew-issue clearing Flex Uploan spreads38%7.5%25%Text7.0%13%6.5%0%6.0%3/105/107/109/1011/10 1/11 3/105/107/109/10 11/10 1/11Source: LCD - Leveraged Commentary & DataTuesday, February 15, 2011Covenant-lite share of first-lien term loans30%23%15%Text8%0%20062007200820092010YT-2/4/11Source: LCD - Leveraged Commentary & DataTuesday, February 15, 2011Loan default rate (principal amount)12What’s in store for 2011?•Defaults hold at 1-3%9outro631.46%01/051/061/071/081/091/101/11Source: LCD - Leveraged Commentary & DataTuesday, February 15, 2011Looking ahead . .• More of the same: Technicals dominate• Until LBO deals emerge (or the market is rattled), issuers remain in driver’s seat:• Lower spreads, better terms, repricing wave• Default rates continue to easeTextTuesday, February 15, 2011Leveraged Finance AnalysisFebruary 2011 - US MarketSteve Mil er - Managing DirectorTuesday, February 15, 2011