Refinancing Slows On Fear Of Risk

Risk aversion is seeping into the U.S. and EMEA leveraged loan markets, according to sister publication Thomson Reuters IFR. Deteriorating macroeconomic news is leaving riskier buyouts exposed and refinancing risk is on the rise, although higher-rated, well-known repeat issuers are still finding a welcome audience in an increasingly bifurcated market.

Secondary prices have slumped in the U.S. and EMEA—Europe, the Middle East and Africa—in recent weeks. The U.S. secondary market has chalked up six straight weeks of declines since the beginning of May and the average bid in the SMi100 (the 100 most widely held loans) recently slipped to 97, according to LSTA/LPC Mark-to-Market Pricing.

The European secondary loan market has lost just over a point from the end of May, and fell below 97 to 96.92 in mid-June, according to data from Thomson Reuters LPC, which tracks the loan market, as trading activity dried up amid fears of wider contagion from Greece’s political and economic chaos.

In the more robust U.S. primary market, however, leveraged issuers are still sporting hefty pro rata portions as bank appetite for loans remains strong and companies such as Dole Foods are still attempting aggressive refinancings despite the secondary decline.

In the more bearish European market, French cleaning products maker Spotless cancelled an opportunistic and aggressive high-yield bond refinancing in June, which is making bankers question the feasibility of dividend recapitalizations.

The U.S. market has seen a pullback in recent weeks and at least 12 smaller and lower-rated issuers flexed pricing up on their institutional loans to clear the market, compared with six downward flexes for higher-rated, well-known issuers as the market split along credit lines and became more discerning.

Dole Foods launched an aggressive $1.25 billion facility to refinance its existing Ba2 rated loan, which seeks to strip out maintenance covenants and reduce its Libor floor by 50bp. As a higher-rated, well-known issuer, Dole is likely to see more than enough demand for its new $315 million term loan B and $585 million term loan C at current terms.

The proposed refinancing was met with a shrug even as wider economic concerns continued to be felt at the lower end of the rating spectrum.

Term loan As remain in high demand in the U.S., with AMC Networks, Penn National Gaming, NRG Energy, Endo Pharmaceuticals, and Ashland all syndicating pro rata tranches of more than $1 billion—and having no problem doing so. What all of these issuers share is a high double-B credit rating profile and name recognition from lenders.

But the market has turned slightly for those issuers that aren’t so lucky. In recent weeks, the U.S. leveraged loan market has gone from welcoming all comers with open arms to welcoming just some of the issuers with open arms. For those at the bottom, the going can be tough.

“It’s not going to have much of an impact on higher-quality, repeat issuers,” said one buyside investor of the recent weakness. “But the small, middle-market, more opportunistic stuff could widen out by as much as a point.”

In Europe, the primary leveraged loan market is more active than it has been all year, with 11 deals totalling €8.4 billion ($12 billion) in syndication to choose from. Although technicals remains strong due to the amount of cash investors have, bankers believe the current market correction due to the unrest and potential default in Greece should mean an end to downward pressure on pricing.

“It really depends on what side of the coin you’re on,” the investor noted.

For those credits on the right side of the coin, pro rata seems to be the way to go, as more and more lenders are tapping into the demand from banks.

(Caleb Frazier is bureau chief of Thomson Reuters LPC in New York; additional reporting by Isabell Witt.)