IFR Magazine – June 08, 2019

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Borrowers sweeten pricing as headline

risk mounts

„ US Spreads have risen 35bp-40bp from a year ago

Borrowers tapping the broadly syndicated US

leveraged loan market to fund their operations

are peddling juicier spreads to attract investors

wary of negative headline news.

Market volatility, impacted by worries about

global growth and rhetoric over the US-China

trade war, is giving investors the jitters as they

seek to put money to work in an overheated

space starved of new opportunities.

Weak terms in loan documentation, fears over

deteriorating covenants and mounting corporate

leverage levels are also impacting spreads,

which are coming in roughly 35bp-40bp wider

than a year ago.

Average yields, for example, on first-lien

institutional broadly syndicated term loans rose

for the fifth straight quarter to 7.61% at the end

of the first quarter of 2019.

“These wider spreads are compensating for

some of the risks and I feel good about where

the market sits,” said David Mihalick, head of

US high yield investments at Barings. “It is

important to be cautious and scrutinize these

deals. We are late in the cycle and are feeling

macro pressures.”

The impact on yields in the large corporate

space stands out when compared to middle-

market loans, reserved for companies generating

between US$10m-US$75m in Ebitda, which

typically price at a premium to broadly

syndicated loans.

Yields in the broadly syndicated market have

climbed so much in the last 18 months that they

were just 0.45% shy of the average yield for

middle-market first-lien loans at the end of the

last quarter, compared to a 1.63% premium in

the first quarter of 2017, according to data from

LPC.

“I think there is a healthy fear rationalizing

the (broadly syndicated) marketplace right now,”

said Tim Gramatovich, chief investment officer

at Gateway Credit Partners, a division of B. Riley

Financial.

JUICED UP

Loans in market this week are already factoring

in the higher spreads. A US$550m seven-year

transaction for B3-rated software developer

COREL is expected to pay 500bp over Libor

while a US$660m seven-year first-lien loan for

foodservice products provider IMPERIAL DADE

is being floated to investors between 400bp-

425bp.

In addition to these, and several other

similarly rated smaller-sized leveraged loans

in market this month, two more B3-rated

companies – analytics firm TIBCO SOFTWARE and

dialysis services company US RENAL CARE – are

raising sizable US$1.82bn and US$1.62bn loans,

respectively.

TIBCO’s seven-year loan is expected to pay

400bp over Libor while US Renal Care’s seven-

year transaction, which backs a US$2.7bn buyout

of the company by a consortium of investors, is

being guided between 450bp-475bp.

“After the market took a pounding in

December, there seems to be a ‘fear premium,’ it

isn’t massive, but it’s around,” said Gramatovich.

Loans for Double B or Single B rated

companies were clearing at an average spread

of 295bp over Libor in June 2018. A year later,

the average spread has ballooned to 335bp,

according to LPC data.

For example, B1-rated mobile marketing

unit APPLOVIN in August last year snared an

US$820m loan at 375bp over Libor and hospital

medicine provider SOUND INPATIENT’s Ba3/B

rated US$575m first-lien loan cleared at just

300bp in June 2018.

“A lot of the deals in the broadly syndicated

loan market right now are around that US$400-

$600m mark and these are pricing based on

technicals in the market,” said Barings’ Mihalick.

Amid the dearth of billion-dollar M&A-linked

opportunities, however, investors are latching

onto the scarce supply in the marketplace while

other lender protections are expected to remain

thin.

“Terms are aggressive, but repeat-issuers

especially in non-cyclical industries that

investors like are good to go,” an investment

banker at a US bank said.

Aaron Weinman