Hello all,
I am completely unfamiliar with the debt space but was wondering if anyone could give me color as to how to tackle a case study that I was given from a ~$2.5B CLO HF. The question gives me a company that issued a Senior Loan in 2017. Then they say that the price is as "95". I am wondering what type of model to use to support my thesis whether to invest in this Senior Loan Offering on the Secondary market or not. Please help as I am Debt Noob, but stumbled upon a cool opportunity.
Thanks.
Some thoughts:
Relative value: - Do you have comps of other loans? You'll need to compare the yields on this - your OID of 95 has a gain of 5 (assuming it's paid at par), which market convention dictates is divided by 3 (so 5/3 per annum). That plus your margin is the yield on book - What are you comparing against? Single-B, double-B? USD/EUR/GBP loans? Industry? Credit: - Can these guys pay back the loan? Across sensitivities? How do financial metrics look like over the course of the loan? - Terms: Assuming you were asked to look at an indenture? How are the typical covenants like - are they loose enough that there is leakage to junior creditors? - Business overview - good or bad? you know - typical commercial stuff
Just my 2 c. Also what is a CLO HF? Do you mean a CLO vehicle attached to a HF?
Thank you for your help. I will send you a PM. Also, Its a CLO fund that is spinning a Distressed HF out of it.
some stuff in your advice is wrong- assuming this is the US loan market. sounds like a bond / HY/ DCM guy in Europe gave you that answer (not / 3, but /4, and not indenture for loans, but credit agreement). for some reason I can’t read my text further from here, but...I am in loan capital markets & syndicate, PM ME, but I’ll givesyndicate. happy&syndicate and synsyndicate
3m LIBOR is 1.00%, and in 2017 it probably had a 1.00% LIBOR floor. assuming L+400, 1.00% floor, 95.0 OID, all in yield is = 400 + 100 + (500/4 = 125) = 525 bps = 5.25%. compare vs. comps and vs. the broader sec. market (paste below). Insight: Loans reset lower across the board: a look at BB vs Single B index spreads and prices With markets in turmoil lately, loan bids have backed up across the board. Since Feb. 20, the average BB Index loan bid was down 5.32 points, to 94.24, on March 11. At the same time, the average single B bid declined 5.44, to 92.35. As a result, the gap between the average discounted spread (to a three-year maturity) of BB and Single B loans in the index has increased only marginally, to 215 bps on March 11, from a recent low of 199 bps on Feb. 20, and remains inside the levels of late 2019 when BB loans were in high demand and single B loans — and B3 in particular — were under pressure. I’d need more info. but to compare to broader secondary, pasted below is yesterday’s insight on secondary prices. infoinformation then that, but
Include the following in your case study: 1) capital structure 2) org chart - should be in the OM/IM 3) debt maturity profile - presume this is a TLA with some amort schedule? 4) simple cash flow model with 3 cases: a base case, a stress case and a default case. Purpose is to see what it would take for the company to default. 5) a recovery analysis to estimate recovery in a default - is typically 40-60% for leveraged loans 6) relative value vs comps, if they gave you any data which you might not have as loans are not publicly traded like bonds/stocks.
Great overview.
The only thing I would add is some covenant analysis with particular focus on how much debt can be issued pari with the loan as well as junior / subordinated capacity. RP capacity to take value out of the structure for dividends, etc is important as well. Of course mention of any maintenance covenants with sensitivities for what has to happen for them to be breached. If it is a cov-lite loan, mention that as well.
agreed, valuable comments but consider the person- he's not a debt / loan guy. you don't wanna be caught trying to talk out of your ass explaining incremental / RPs for the 1st time. better to maybe summarize along w/ key terms. cob-lite, sure. but that's to be expected / the norm
what’s the name of the company? should be easy to find a summary of the deal on LCD or LevFin Insights. from there, easy to pull industry comps. keep in mind size $ of the Term Loan B is a consideration for CLOs (>liquidity), and most likely needs a rating
PMed.
Im new here. just started using WSO in the last 24 hr and this was my 1st set of comments. gimme a minute to figure out where PMs are hidden...appreciate the kind words!
how did it go?
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