U.S. leveraged loans ready for strong second half

By Jonathan Schwarzberg, Reuters

The sizzling U.S. leveraged-loan market is expected to maintain its breakneck pace in the second half and potentially set volume records despite lower M&A activity as investor demand continues to see off concern about mounting macroeconomic and geopolitical risks.

Robust demand for floating-rate assets in a rising interest-rate environment has pushed leveraged-loan volume to $874.7 billion year to date, 78% higher than the $492.9 billion raised in the year-earlier period.

“If we keep the same levels, we’re going to have one of the highest years ever,” said a senior leveraged finance banker.

Several M&A deals announced before the Sept. 4 Labor Day holiday are expected to hit the market soon, including $1.6 billion of financing to back internet-security company DigiCert’s purchase of Symantec’s web-certification business. UBS is leading the loan financing with Credit Suisse, Jefferies, Goldman Sachs and Macquarie Group.

Pharmacy manager PharMerica arranged $1.1 billion of commitments to back its buyout by PE firm KKR. Goldman will lead the first-lien portion while Morgan Stanley will lead the second-lien piece.

Although buyout activity has strengthened in Q3, it has not been enough to meet overwhelming demand from loan buyers, including collateralized-loan-obligation funds, loan funds and foreign investors.

Investors are favoring loans in tech, healthcare, industrials and packaging, but the picture is mixed as other sectors, including retail and energy, remain pressured, which is reflected in low secondary prices.

In Q3 so far, sponsors have lined up more than $20 billion of financing to back LBOs, nearly 2 1/2 times the US$8.9bn of buyout financing priced in the year-earlier period, Thomson Reuters LPC data shows.

Most of this volume has come as issuers take advantage of strong market conditions to extend maturities by refinancing or simply repricing debt lower in the primary market as secondary prices climbed, emphasizing strong investor appetite.

Bankers are watchful of possible pitfalls from political concerns such as the debt-ceiling negotiations and heightened tensions with North Korea. But they said that it is mainly the U.S. economy’s strength that is reassuring investors to put their money into the asset class.

The extraordinary investor demand for buyout deals that hit the market in the runup to Labor Day kept the market unusually busy in the August holiday period, bankers and investors said.

Leveraged loans, especially large deals, can often take two weeks to go through syndication. But deals flew through the market in August, as pharma-research services provider Parexel’s buyout loan to back its acquisition by Pamplona Capital showed.

The issuer launched a $2.07 billion seven-year term loan on Aug. 7 and wrapped up pricing just three days later on Aug. 10. The deal priced at 0.3 percentage point over Libor, at the tight end of 0.3 to 0.325 point pricing guidance. Bank of America Merrill Lynch led the transaction.

In another display of insatiable demand, office-supplies retailer Staples’s proposed $2.4 billion term loan backing Sycamore Partners’ buyout of the company’s delivery business was oversubscribed by the time the deal launched on Aug. 2. As a result, the issuer was able to increase the size of the term loan to $2.9 billion and lower pricing to 0.4 percentage point over Libor from 0.425 point over Libor. UBS led the deal.

Bankers said that absent any market shocks, they expect issuers to be able to continue to access favorable borrowing conditions in the runup to year-end. Private equity firms remain particularly well positioned to exploit market conditions with opportunistic deals.

“The sponsors are very sophisticated,” the banker said. “They have their own terms. They’re always going to extract every single dollar and every single term that they can.”

Action Item: Read about KKR’s healthcare tear from Buyouts’ Sarah Pringle: pehub.com/buyouts/kkr-on-a-healthcare-tear-builds-medical-transport-giant/

Photo of Staples store in West Palm Beach, Florida, on April 7, 2014, courtesy NoDerog/Editorial Unreleased/Getty Images