A leveraged loan collapses and reveals key risk in credit market
Skip to main content
pilogo-NEW
Subscribe
  • Subscribe
  • My Account
  • login
  • NEWS
    • Asset owners and the coronavirus
    • Alternatives
    • Consultants
    • Coronavirus
    • Defined Contribution
    • ESG
    • Frontlines
    • Hedge Funds
    • Investing / Portfolio Strategies
    • Money Management
    • Pension Funds
    • People Moves
    • Private Equity
    • Real Estate
    • Searches & Hires News
    • SECURE Act
    • Special Reports
    • WorldPensionSummit
    • Ron Schmitz
      Pandemic drives faster transition for Virginia to private markets
      Mubadala Investment Co. logo
      Mubadala draws on portfolio in coronavirus fight
      T.J. Carlson
      Texas Muni reduces downside risk during pandemic, finding opportunities now
      Scott Davis
      ‘Triage plan’ at Indiana system helped stem losses
    • BentallGreenOak agrees to acquire Metropolitan Real Estate Equity
      watch video
      0:45
      Private funds weathered 2020 turmoil
      Daniel McHugh
      Aviva Investors promotes from within for real assets CIO
      Marc Rowan
      More alts managers seek expansion to retail market
    • Kieran Mistry
      Hymans Robertson picks head for new non-traditional risk transfer unit
      Troy Saharic
      NEPC brings on director of new business development
      Bill Foley
      Foley-backed SPAC agrees to $7.3 billion deal with Alight
      Jason Schwarz, chief operating officer of Wilshire,
      New owners have big plans for future of Wilshire
    • OMERS CEO Blake Hutcheson
      OMERS records worst loss since 2008 on bad COVID-19 bets
      Mitchells & Butlers turns off tap on pension contributions until April
      Jerome Powell, chairman of the Federal Reserve, adjusts his glasses during a Senate Banking, Housing and Urban Affairs Committee hearing in Washington on Sept 24, 2020.
      Powell says Fed will hold steady during economic recovery
      Institutional investors mobilize for equitable global COVID-19 response
    • Database’s debut focuses on public-sector DC plans
      DC plan sponsors differ on need for annuities – survey
      Biden’s retirement idea getting the cold shoulder
      Few participants tapped savings to weather pandemic – Vanguard
    • Emissions from a smokestack in Poland
      Asset managers facing more scrutiny on ESG issues – report
      Boris Johnson, U.K. prime minister, hosts the U.N. Security Council's virtual meeting on climate change risks in London on Feb. 23, 2021
      Progress in fighting climate change falls short – U.N.
      Justin Trudeau, Canada's prime minister, smiles during a virtual joint news conference with U.S. President Joe Biden in Ottawa on Feb. 23, 2021
      U.S. joins forces with Canada on climate change
      Signage is displayed at Harvard University Health Services in Cambridge, Mass., on April 20, 2020
      Harvard endowment’s fossil-fuel investments drop to 2% of assets
    • Donation illustration
      Jefferies will use trading commissions to do good
      Michael Arougheti
      SPACs ride wave as latest investment darling
      Spirit winners
      Prudential honors young people who are helping out
      2 U.K. pension execs take on ESG investing in new podcast
    • Robert 'Rob' Shafir listens during a Senate Permanent Subcommittee on Investigations hearing in Washington on Feb. 26, 2014
      Sculptor hedge fund hits sixth straight year of outflows
      The WallStreetBets forum on the Reddit Inc. website on a laptop computer and the GameStop logo on a smartphone in an arranged photo.
      GameStop frenzy has hedge fund managers rethinking next moves
      Gabe Plotkin, chief investment officer and portfolio manager of Melvin Capital Management, speaks during the Sohn Investment Conference in New York on May 6, 2019
      Citadel, Point72 back Melvin with $2.75 billion after losses
      Shanghai skyline
      Global hedge funds struggle even in a more open China market
    • Illinois Teachers chalks up $1.3 billion in investments, commitments
      Emissions from a smokestack in Poland
      Asset managers facing more scrutiny on ESG issues – report
      Indiana chooses PIMCO for emerging markets debt
      Boris Johnson, U.K. prime minister, hosts the U.N. Security Council's virtual meeting on climate change risks in London on Feb. 23, 2021
      Progress in fighting climate change falls short – U.N.
    • Margaret Anadu
      GSAM chooses global head of sustainability and impact
      Signage for AMP Ltd. adorns the top of a building in the Docklands area of Melbourne on May 10, 2018
      Ares, AMP eye joint venture
      Thasunda Brown Duckett
      TIAA appoints Thasunda Duckett as president and CEO
      Brightwood Capital adds senior investment professional
    • Thomas Spencer
      Oklahoma Teachers chief Tom Spencer to retire
      Swedish flags fly from a tourist souvenir shop in Gamla Stan in Stockholm on March 26, 2020
      Sweden’s AP1 gains 9.7% in 2020
      CDPQ returns 7.7% in 2020
      Cleveland-Cliffs to pour $202 million into pension plans in 2021
    • Thomas Spencer
      Oklahoma Teachers chief Tom Spencer to retire
      Margaret Anadu
      GSAM chooses global head of sustainability and impact
      Doug Heron
      Lothian Pension Fund to lose CEO this year
      Correction: PGIM Real Estate
    • Carlyle secures $4.1 billion ESG-related credit facility
      Hamilton Lane raises $3.9 billion for fifth secondary fund
      PSG closes first Europe-focused fund at $1.5 billion
      Kohlberg closes latest private equity fund at $3.4 billion
    • Sebastiano Ferrante and Jocelyn de Verdelon
      PGIM Real Estate turns to staff to fill new roles
      European managers key in on specialist strategies
      Ingrid Jacobs
      Jones Lang LaSalle brings on head of diversity and inclusion
      EQT inks deal to buy real estate manager
    • Retirement cartoon
      Hopes rising for retirement readiness in 2021
      Neal and Brady
      Retirement security could be only issue both sides accept
      Shawn O'Brien
      Annuities coming to target-date funds, but not right away
      David Ireland
      Sponsors returning to questions about in-plan annuities
    • Charging Bull, sometimes referred to as the Wall Street Bull or the Bowling Green Bull, a bronze sculpture that stands on Broadway just north of Bowling Green in the Financial District of New York City
      Top-performing managers Q4 2020
      P&I 1,000 largest retirement plans: 2021
      Retirement in emerging markets
      Outlook 2021
    • U.S. still a key market for investors
      Collected coverage of P&I's 2020 WorldPensionSummit
      Pedestrians pass a large advertisement on the Arndale Center shopping mall reading 'Act now to avoid a local lockdown' in Manchester, England
      COVID-19 puts new opportunities and risks on the agenda - WPS panelists
      Screens display stock price information over the trading floor of the NYSE Euronext exchange in Paris
      Private assets will continue to grow in portfolios – WPS panelists
  • Data
    • Research Center
    • Searches & Hires Database
    • Searches & Hires News
    • RFPs
    • Charts / Infographics
    • Sponsored Research
    • Trackers
    • Q2 2020 searches and hires overview report
      Q2 2020 money manager M&A activity summary
      Q2 2020 legal overview report
      Q1 2020 searches and hires overview report
    • Illinois Teachers chalks up $1.3 billion in investments, commitments
      Indiana chooses PIMCO for emerging markets debt
      New York Deferred Comp plan re-ups with Goldman as stable value manager
      Ann Arbor Employees taps Artisan Partners for international equities
    • Illinois Teachers chalks up $1.3 billion in investments, commitments
      Indiana chooses PIMCO for emerging markets debt
      New York Deferred Comp plan re-ups with Goldman as stable value manager
      Ann Arbor Employees taps Artisan Partners for international equities
    • Emerging Market Equity Manager Services
      Securitized Credit Manager Search
      Private Placements Asset Manager Search
      Actuarial Consultant Search
    • Taiwan Semiconductor’s No. 1 in the emerging markets book
      U.S. fixed-income returns post another positive year
      Nasdaq delivers an impressive year
      U.S. dollar's recent decline continues
    • Institutional Investors: Shared Expectations, Divergent Paths
      Global Investor Study 2016
      Workplace Financial Wellness
    • U.S. Endowment Returns Tracker
      Pension Fund Returns Tracker
      Earnings Tracker
      Corporate Pension Contribution Tracker
  • Insights
    • Opinion
    • White Papers
    • Industry Voices
    • Letters to the Editor
    • Partner Content
    • Publisher's Update
    • Tesla cartoon
      Don’t confuse wealth creation with retirement saving
      Top 1000 cartoon
      Top 1,000 retirement plans weather storm just fine
      Infrastructure cartoon
      You must go big on infrastructure, Mr. President
      Retirement cartoon
      Hopes rising for retirement readiness in 2021
    • Shifting DC Times – Winter 2021
      Bond ETFs show maturity during Covid market mayhem
      Pension Consolidation: Optimizing Scale and Maximizing Efficiency
      China is embarking on a new stage of growth
    • David Blitzstein
      Commentary: Without a national retirement policy, Americans face a future of pension crises
      Lawrence Cunningham
      Commentary: Gensler should keep Clayton’s pragmatic proxy adviser rules
      My-Linh Ngo
      Commentary: Pension funds and the role of the debt market in the fight against climate change
      Bill Peressini
      Commentary: Carbon’s elemental role in the future of impact investing
    • Writer using a typewriter
      OCIO industry needs to adopt GIPS
      Writer or journalist workplace. stock illustration
      Even as it assails China, Trump administration emulates it
      Skeptical of Main Street support for proxy adviser proposal
      Focus on manager diversity pushes asset owners’ to walk the talk
    • P&I Content Solutions
      How will gold react?
      To people shaking hands
      P&I Content Solutions
      Lessons From 2020: Today’s OCIO Model Passes a Major Test of Governance
      Sponsored Content By MassMutual
      Leveraging Data to Manage Risk
      Sponsored Content By iShares
      ETFs are becoming a cornerstone of insurance equity portfolios
    • Help us help you by supporting quality journalism
      You Must Believe in Spring
      Everything Must Change
      Tomatoes & Investments
  • Multimedia
    • Videos
    • Webinars
    • Polls
    • Slideshows
    • Charts / Infographics
    • watch video
      0:45
      Private funds weathered 2020 turmoil
      watch video
      0:59
      Secure choice and other retirement plans at a state level
      watch video
      3:33
      P&I 1,000 by the numbers 2021
      watch video
      1:33
      A look at hiring activity in 2020
    • Emerging Markets: Expanding Investors’ View
      2021: A Fixed Income Odyssey
      Technology is the New Oil: The Changing Nature of Emerging Markets
      Powering the Change: The power of diversity and inclusion
    • POLL: Working after the pandemic
      POLL: The year ahead for the 1,000 largest U.S. retirement funds
      POLL: The Biden administration’s economic plans
      POLL: Retirement issues in 2021
    • view gallery
      9 photos
      Coronavirus and the markets
      view gallery
      22 photos
      The 1,000 largest retirement funds: 2020
      view gallery
      10 photos
      Outlook 2020
      view gallery
      10 photos
      2019 as seen through the eyes of Roger
    • By the Numbers for February 2021
      Top Performing Managers of Inflation-Protected Fixed Income (TIPS), 4th Quarter 2020
      Top Performing Managers of Long-Short Equity, 4th Quarter 2020
      Top performing managers by category: separate accounts, 4th Quarter 2020
  • Events
    • Conferences
    • Webinars
    • Defined Contribution Spring Virtual Series
      DC Investment Lineup Virtual Series
      ESG Investing Virtual Series
      Private Markets Virtual Series
    • Emerging Markets: Expanding Investors’ View
      2021: A Fixed Income Odyssey
      Technology is the New Oil: The Changing Nature of Emerging Markets
      Powering the Change: The power of diversity and inclusion
  • Careers
  • Research Center
MENU
Breadcrumb
  1. Home
  2. MARKETS
July 16, 2019 01:21 PM

A leveraged loan collapses and reveals key risk in credit market

Bloomberg
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print
    Bloomberg

    Operating out of a Chicago suburb, in a low-slung, red-brick building wedged between a Hyatt and a Radisson, Clover Technologies is in the mundane business of recycling everything from inkjet cartridges to mobile phones.

    But in the past week it abruptly — and alarmingly — caught the attention of Wall Street. Almost overnight, a $693 million loan Clover took to the market five years ago lost about a third of its value. The startling nosedive stung even sophisticated investors, people who deal in the arcane business of trading corporate loans.

    Clover's loan isn't especially large by Wall Street standards, yet its stark and swift decline set off fresh alarm bells — bells that regulators have been sounding for months. It immediately became a real life example of the perils of investing these days in the $1.3 trillion market for leveraged loans, where a global chase for yield has allowed an explosion in borrowing and lax underwriting. In a market where trading can be thin — and at a time when illiquidity is suddenly becoming a prominent concern in credit circles — the episode shows how loans to highly leveraged companies can quickly implode when fortunes change.

    When buyers "head for the exits at the same time, prices can drop fast and furiously" given the lack of liquidity, said Soren Reynertson of investment bank GLC Advisers & Co., which specializes in debt restructuring.

    A representative for 4L Technologies Inc., Clover's legal name, and its private equity owners, Golden Gate Capital, declined to comment.

    Clover had been operating since 1996 when it was acquired by Golden Gate in 2010 for an undisclosed price. Golden Gate followed the usual path of private equity buyouts — it piled debt on the underlying company to extract dividends.

    Using the leveraged loan market as a wallet, the company took loans that funded dividend payments totaling at least $278 million — $100 million in 2013 and $178 million in 2014. (Portions of the overall proceeds went to shareholders as well as to refinance the company's existing debt and certain fees, according to a Moody's report.) Clover also asked lenders for a further $100 million in 2014 to pay for an acquisition.

    Those loans, as is typically done, were bought mostly by mutual funds and collateralized loan obligations, which bundle such leveraged debt into higher-rated securities that are pitched to more risk-averse investors. There's been little trouble finding buyers for CLOs in recent years. With yields on high-grade bonds hovering near zero across much of the world, investors have been hungry for the juicy returns that these loans offer and, more and more, tend to overlook the lack of protection afforded.


    Covenant problems

    Indeed, Clover's deal, like many these days, was known as "covenant-lite.'' It contained no provisions that required Clover to alert investors to signs of trouble after undergoing financial tests every quarter. That meant that investors were left with little leverage over the company. Jessica Reiss, head of leveraged loan research at Covenant Review, describes the growing number of weak credit agreements as "death by a thousand paper cuts."

    But Clover's substantial debt left little room for error, and soon after the company began struggling. In 2014, S&P Global Ratings lowered the company's outlook to negative and three years later Moody's Investors Service and S&P downgraded its rating. Still, with the exception of a sell-off two years ago, the loan largely held its value in the secondary market.

    Until July 9. Clover disclosed that day it had lost two key customers and hired advisers to study its options. The price of its loan quickly plummeted from 97 cents to about 65 cents, which put it in the distressed category.

    Two days later, Moody's downgraded the company a notch to Caa3. It cited its "aggressive financial policies, evidenced by its private equity ownership and history of shareholder distributions and large debt-funded acquisitions.''


    Distressed loans

    The downgrade accelerated the fall by creating a bevy of sellers. CLOs and mutual funds, among the biggest holders, were likely forced to dump the loans because they are limited in how much they can own in distressed loans.

    Investors also bore all the losses because the deal was financed by a single loan only — no other loans or high-yield bonds were used. In other troubled deals, any unsecured debt would take the brunt of the losses first, cushioning the blow. The use of these loan-only capital structures is rising, showing up in about 60% of buyouts, a sign of just how pliant investors have become.

    Moody's now predicts a higher likelihood Clover will default on its debt obligations. The ratings agency cited concerns over long-term viability of the business and "unexpected" operational developments. Its debt is just over six times its earnings, a level that typically raises lender concerns about the company's ability to meet its financial obligations. Another warning sign came in May when the company pulled a seemingly attractive refinancing plan that offered a high yield of nearly 9% with a short, three-year maturity.

    Investors may recall similar blowups in the credit market. American Tire Distributors' bonds and loans plunged into distress less than a month after it announced the loss of two key suppliers, Goodyear and Bridgestone. ATM-maker Diebold Nixdorf Inc. also saw its bonds fall to almost half their face value after it posted an unexpected second quarter loss.

    "Highly levered companies are even more sensitive to reductions in revenue,'' said Reynertson. "Cash flows can evaporate overnight."

    Related Articles
    Investors suing J.P. Morgan may redefine the leveraged loan market
    Concerns rising over leveraged loan market
    S&P warns leveraged loan market could 'turn sharply'
    Recommended for You
    Treasury yields signal buy opportunity for Japanese investor
    Treasury yields signal buy opportunity for Japanese investor
    Roaring reflation trade rips $640 million from long-bond ETF
    Roaring reflation trade rips $640 million from long-bond ETF
    Analytic Investors sees Buccaneers sailing to Super Bowl victory
    Analytic Investors sees Buccaneers sailing to Super Bowl victory
    How will gold react?
    Sponsored Content: How will gold react?
    sponsored
    Events
     
     
    Sponsored
    White Papers
    Shifting DC Times - Winter 2021
    Bond ETFs show maturity during Covid market mayhem
    Pension Consolidation: Optimizing Scale and Maximizing Efficiency
    China is embarking on a new stage of growth
    GP-LED OPPORTUNITIES AT THE SMALLER END OF THE MARKET
    Gold Outlook 2021
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    pilogo-NEW
    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    150 N. Michigan Ave.
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Content Solutions
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2021. Crain Communications, Inc. All Rights Reserved.
    • NEWS
      • Asset owners and the coronavirus
      • Alternatives
      • Consultants
      • Coronavirus
      • Defined Contribution
      • ESG
      • Frontlines
      • Hedge Funds
      • Investing / Portfolio Strategies
      • Money Management
      • Pension Funds
      • People Moves
      • Private Equity
      • Real Estate
      • Searches & Hires News
      • SECURE Act
      • Special Reports
      • WorldPensionSummit
    • Data
      • Research Center
      • Searches & Hires Database
      • Searches & Hires News
      • RFPs
      • Charts / Infographics
      • Sponsored Research
      • Trackers
    • Insights
      • Opinion
      • White Papers
      • Industry Voices
      • Letters to the Editor
      • Partner Content
      • Publisher's Update
    • Multimedia
      • Videos
      • Webinars
      • Polls
      • Slideshows
      • Charts / Infographics
    • Events
      • Conferences
      • Webinars
    • Careers
    • Research Center