Mid-Market Loan Yields Edging Higher

  • More loan flex upward in pricing
  • Still low by historical standards
  • Cov-lite appears in the mid-market

Term loan yields in the United States rose to 7.32 percent in November for mid-market borrowers, an indication that demand for such financing is finally catching up with the supply, according to sister service Thomson Reuters Loan Pricing Corp. Higher yields raise the cost for sponsors to do deals, potentially pricing some transactions out of the market.

The yield has widened from 6.55 in October, according to LPC, which tracks the loan market. It said that lenders were getting spreads of 556 basis points over Libor floors of 1.28 percent, with a 0.48 percent original issue discount.

Loan flexes also are moving up. For most of the year, downward flexes have prevailed in the middle market, with lending syndicates cutting the spreads they charge. In November, an equal number of loans flexed upwards as flexed downward, LPC said.

Another indication that the market is showing signs of tightening: The mid-market yield premium widened in November to 114bp over large corporate yields, said LPC, which defines the middle market as total loan deal and revenue size of $500 million and below.

But on a quarterly basis, mid-market yields continue to ease, falling sequentially to 7.00 percent in the fourth quarter from 7.27 percent in the third. At the start of the year, mid-market loans were yielding 7.94 percent.

Yields have generally remained low since the end of the financial crisis in 2009, as government efforts to keep borrowing costs down have combined with a sluggish economy to keep interest rates down. For the most part, leveraged loans have been going not to make new deals but to help sponsor-backed borrowers refinance existing debt or to conduct dividend recapitalizations.

As an indication of the continuing slack in the loan market, covenant-lite deals are on the rise in the middle market, LPC reported. Such arrangements, in which lenders forgo certain protections in order to win a deal, have long been the province of the broadly syndicated market for larger borrowers but have historically been minimal in the middle market. In the fourth quarter, however, nearly $2.2 billion of cov-lite loans priced, LPC reported. As a point of comparison, LPC recorded no mid-market cov-lite loan volume from the first quarter of 2008 to the third quarter of 2010.

In one recent example, Fibertech Networks, a holding of Court Square Capital Partners, was able to secure a $380 million covenant-lite, dividend recap term loan in November. The loan closed at Libor plus 450, the tight end of its range, with a L+125 floor, LPC reported. The deal also included a $50 million revolving credit facility.

“Cov-lite has been the province of private equity, which is present in almost 90 percent of all new cov-lite deals,” Christina Padgett, a senior vice president in the corporate finance group of Moody’s Investors Service, said in a recent report.

But when it comes to sponsor contributions, most lenders have been able to keep the equity portion of the purchase price around 35 percent of the total deal, said Jeff Kilrea, the managing director of sponsor finance at CIT Group Inc. “One thing most of us have been diligent about is the amount of equity relative to the total capital.”