No summer slump for leveraged loans

Borrowers are lining up to refinance or reprice existing debt at lower spreads and private equity sponsors are raising loans to fund dividend payouts to shareholders, supported by demand from CLO buyers, sister service Thomson Reuters Loan Pricing Corp reported.

Formula One is in the market with a $3.8 billion refinancing that will finance a $1 billion dividend to owner CVC Capital Partners, while Springer Science + Business Media, backed by BC Partners, also is raising a multi-billion cross-border loan that reprices a U.S. dollar Term Loan B2 and replaces a euro Term Loan B1. Elsewhere, education technology company Blackboard, a holding of Providence Equity Partners LLC, also has surfaced with an $868 million repricing loan.

Investors and arrangers are pointing to unabated issuance of collateralized loan obligations as the main driver of institutional appetite as issuers take advantage of a receptive market while they can even as geopolitical problems mount. “Certainly due to robust CLO creation alone, this is a strong market, and there is no time like the present. Issuers are thinking, why wait? Why not take advantage of a decent market?” said Leland Hart, head of BlackRock’s bank loan team.

CLO vehicles are the main institutional buyers of leveraged loans and $7.276 billion in new CLOs have printed in July so far. Nearly $11.9 billion of new CLOs were inked in each of the three previous months, according to Thomson Reuters LPC data. “There have been a lot of fresh prints in the CLO market. So much institutional money has been raised,” one banker said.

Smaller issuers are also benefiting from favorable market conditions, another sign of the market’s strength. Marine transportation company U.S. Shipping and Zest Holdings, a manufacturer of dental supplies that is backed by Avista Capital, launched $213 million and $160 million term loan repricings in July.

Dutch bakery ingredients producer CSM Bakery Solutions tapped investors for $313 million in first- and second-lien covenant-lite incremental term loans to refinance debt and pay a dividend to financial sponsor Rhone Capital. Grenada-based medical school St. George’s University is in the market with a $250 million covenant-lite deal to fund a recapitalization.

Several opportunistic recapitalizations were shelved only a couple of months ago as the market weakened and their return shows increasing confidence. The U.S. leveraged loan market softened in April when a rise in interest rates was pushed out and retail investors who had been investing in leveraged loans as a possible hedge against interest rate rises started to pull cash out of the market to invest elsewhere.

This put the brakes on a relentless wave of refinancing and repricings that dominated 2013 amid strong demand from yield-starved retail and institutional investors. New money loans increased to 69 percent of total leveraged loan volume in the second quarter of 2014, up from 48 percent in the first quarter. This increase comes even as overall issuance fell 20 percent in the first half due to a drop in refinancings.

Investors’ seemingly insatiable appetite for floating rate loans after two years of non-stop inflows into bank loan mutual funds had pushed yields to record lows earlier this year. Leverage levels were approaching historic highs and aggressive structures and issuer-friendly terms proliferated.

Retail investors started pulling money out in April, just as new money activity was on the rise. The combination of more M&A activity and the reappearance of riskier dividend recapitalizations is now pushing yields higher.

Yields on first-lien institutional term loans were 5.55 percent in July, up from 4.94 percent in June, which is almost on par with the 5.58 percent seen in May when yields climbed as the retail bid exited. Nearly 60 percent of deals are backing M&A activity and dividend recapitalizations are priced above 5 percent. In contrast, more than half of the refinancings are priced below 5 percent.

The loan market has been relatively resilient relative to other asset classes so far this year. Retail investors withdrew $412.6 million from bank loan mutual funds in the week ending July 23, according to Lipper FMI, in line with $440.1 million the previous week. High yield bonds, in contrast, saw a big exodus as investors withdrew $2.38 billion during the week.

“There’s been some volatility in the world, you’ve got high yield outflows, but as far as loans are concerned the loan picture looks pretty solid,” said a second banker. “Maybe some issuers are getting a little nervous that the good times are not going to last forever and they are coming to the market.”

Leela Parker Deo is a senior correspondent for Thomson Reuters LPC.