- Buyout activity healthy but softening
- Recapitalizations, refinancing abound
- Middle-market pricing better than broadly syndicated loans
Leveraged loan providers said credit demand remains robust as the third quarter of 2016 drew to a close, with a quick pace of recapitalizations making up for a flat M&A environment.
On the plus side, credit strategies remain in favor with LPs searching for greater yield than government debt. Also, loan pricing has been more favorable for borrowers partly because of the thinner crop of buyouts this year.
“Terms are getting looser — it’s been a factor of anemic deal market,” Bill Casperson, managing director of Oaktree Mezzanine Finance, said at PartnerConnect West 2016 in San Francisco.
Scott Cullerton, director in the sponsor finance unit of Kohlberg Kravis Roberts & Co, said while pricing for equity in buyouts has been driven up, competition for debt has been keen as more non-bank lenders move into the space.
“We’ve all raised billions dedicated to this space,” Cullerton said. “There are a bunch of other firms that have done so…Terms are getting more competitive.”
Larger lenders have been dipping down further into the middle market partly because it gives them more visibility into a leveraged loan deal than participating in a syndicated offering, Cullerton said.
“In a direct deal, you’re the only lender or you’re part of a small group of lenders,” he said. “You can actually have much more influence over your outcome. You have a seat at the table…versus a large syndicated deal where you’re just along for the ride.”
Kunal Soni, managing director at Carlyle GMS Finance, said the firm is cautious about a possible downward turn in the economy.
“Certainly we’re in the latter innings of some cycle,” Soni said. “We don’t want to take junior debt risk in cyclical businesses.” Mergers and acquisition activity has been benign but not particularly bullish, he said. In the middle market, Carlyle is seeing opportunities to make loans to platform companies for add-on deals and refinancings, he said.
Phil Tseng, managing partner at Tennenbaum Capital Partners, said he’s seeing more insurance companies, pension funds and sovereign wealth funds participating in second-lien and mezzanine debt deals.
The firm has been casting a wider net and focusing on its origination efforts, but it’s not rushing into loans, he said.
“We err on the side of slower deployment if we don’t see an opportunity,” Tseng said. “You’re not paid for being a hero in credit.”
Their comments came at a panel, Navigating the Credit Markets to Maximize Returns, at the PartnerConnect West event, held September 27-28 at Hotel Nikko San Francisco.
A total of 27 new leveraged loan deals took place in the week ended September 23 for a total of $18.9 billion, according to Z Capital’s Economic & Credit Market Weekly Briefing for the seven days ending September 26. Activity moved up significantly compared to the previous three weeks, which saw only seven deals representing $4.1 billion in credit.
Year-to-date new business in leveraged loans totaled $257 billion, down about 2 percent from the year-ago period, according to JP Morgan data cited by Z Capital. Sixty-one percent of total volume came either from refinancings or repricing of debt.
Overall, loan deals in September are being met with both lower pricing and looser leverage metrics, according to SPP Capital’s monthly update.
“Liquidity is at a high point for 2016, with more investors having more dry powder than they have had for years. Increasing share prices are bringing BDCs back into the market and creating more competition for senior and mezz lenders alike,” Stefan Shephard, managing director of SPP, said in a research note.
Action Item: See loan pricing data from Reuters here, https://www.loanpricing.com/
A sign for Bank Street and high rise offices are pictured in the financial district Canary Wharf in London in this October 21, 2010 file photo. REUTERS/Luke Macgregor/Files