CLO primary quiet; leveraged loan concerns remain; Windstream bankruptcy in focus

By Rebecca Melvin

New York, March 7 – No new deals were heard on Thursday in the collateralized loan obligation market as concerns regarding the risks of the volume of leveraged loans remain in the cross hairs of regulators and investors.

Leveraged loan volumes spiked in the past two years, and both the International Monetary Fund and Federal Reserve Board have flagged the risk this might pose to the broader financial system. In a blogpost in November, the IMF said the volume was approaching a threatening level.

Leveraged loans, which get packaged into CLOs, are typically used to finance private equity transactions, mergers and acquisitions, or to refinance or recapitalize existing debt on a company’s balance sheet. The debt ‘s floating rates make them vulnerable to end-cycle markets and rising rates.

Windstream Holdings Inc.'s bankruptcy filing on Feb. 25 increases the number of broadly syndicated United States CLOs with some default exposure, but aggregate default exposure remains low, Fitch Ratings said in a recent report.

The debt of the Little Rock, Ark.-based telecom service provider is currently found in 28% of the 567 broadly syndicated loan CLO portfolios under Fitch's surveillance, making it the most widely held defaulted issuer. But total Windstream principal at par is only 0.4% of the aggregate par balance in those portfolios, Fitch said.

The default stemmed from a court ruling in favor of a Windstream bondholder, Aurelius Capital Management, LP which found that the 2015 spinoff of Windstream's copper wire and fiber cable business into a REIT, Uniti Group, was invalid. The court awarded $310 million to Aurelius Capital. The court also found that Windstream violated terms of the indenture in an impermissible sale and leaseback transaction, and subsequent actions did not waive or cure the default arising from the breach of the covenant.

Fitch believes Windstream’s first-lien senior secured loans, the instruments held by the BSL CLOs, are well covered. The senior secured instruments carry recovery ratings of 'RR1,' corresponding to estimated recovery upon default of 91%-100% of claims. Most trading activity on Windstream by CLOs has been to reduce exposure since the second half of last year.

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