2020-04-04 IFR Magazine

90 International Financing Review April 4 2020

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Leveraged loans frozen as market grapples

with new normal

„ US Investors are focusing on buying loans in secondary

Participants in the US leveraged loan market are

revising the landscape for deal-making in the

midst of the coronavirus pandemic, which has

rocked financial markets over the past month and

brought new syndicated loan issuance to a halt.

With new issuance frozen, mergers and

acquisitions-related transactions are pending

as bankers and investors grapple with a

significantly different environment from which

they originally committed to lend.

Concerns over the pandemic have sent

markets into a frenzy over the past month as

many US businesses have closed their doors and

ceased operations on government order.

Bankers have not syndicated a Term Loan B

among investors since March 11. Now they are

determining when the next window will open

to launch loans to a buyside that had been

clamouring for new money opportunities before

the volatility set in.

With no new transactions in sight, investors

are focusing on buying loans in the secondary

market. They are targeting loans that have fallen

some 20 cents in value from levels near 100

cents on the dollar since the respiratory virus

gripped the asset class.

The LPC 100, a cohort of the 100 most liquid

US loans, fell by more than 20% to 77.9 cents on

March 23, but rebounded to 88.1 cents on March

31 as investors committed to loans through the

secondary space, Refinitiv LPC data show.

The sell-off in prices last month was driven

by liquidity needs and economic uncertainty

in the coming quarters, according to Ryan

Kohan, a portfolio manager with Western

Asset Management. At lower market levels,

opportunistic buyers piled into liquid companies’

loans, driving secondary prices higher.

“As we cleared the 80 (cents) price threshold

and 85 (cents) for higher quality names, mark-

to-market leverage vehicles were no longer

under potential selling pressure,” Kohan said.

“This technical has caused market prices (to go)

higher as secondary offers have been met by

increasing loan appetite from managers going

into quarter-end with healthy cash balances.”

Consumer-driven companies, such as food

distributors or wholesalers, are proving popular

with investors, which expect consumers to

demand more from grocery providers at a time

of isolation.

US FOODS‘ term loan has traded up to an

average bid of 85–86 cents from 80.5–81 cents

in the last week, and HOSTESS BRANDS, known for

its Twinkies and CupCakes snacks, has a term

loan bid at 91–92 on Tuesday, up from 86–86.5

in the prior week.

TOUGH SELL

In recent weeks, the US Federal Reserve has

enacted emergency lending powers to prop up

financial markets, including purchasing billions

of US dollars in Treasury bonds and mortgage-

backed securities. It is unlikely, however, that the

central bank will aid riskier sections of corporate

debt, such as leveraged loans or high-yield

bonds.

“Our world is like ‘Lord of the Flies’,” one

investor said. “It’s about what companies can

come out of this with visible cashflow because I

do not believe there will be government support

for leveraged loans.”

Banks, meanwhile, face a tough choice for

new loans backing acquisitions. Lenders can

either hold the debt and syndicate the loans

later, or launch deals to investors for the best

possible price, which will likely result in banks

having to take a loss on the financing due to the

adverse economic conditions.

“Underwriters can exercise their flex rights to

increase pricing or improve call protection (on a

syndicated loan), but this market is so bad, they

may exhaust their entire capacity to flex a deal,

and that may still not be enough to break-even,”

said Todd Koretzky, a leveraged finance partner

at law firm Allen & Overy.

Large-scale acquisition financings, including

gaming operator ELDORADO RESORTS‘ US$3bn

loan partially supporting its purchase of peer

Caesars Entertainment, and the €11bn of loans

backing the €17.2bn purchase of German firm

ThyssenKrupp’s elevators division are in flux.

Bankers are in no rush to syndicate the debt this

quarter.

“It will be interesting to see who will be

bold enough to go first (into syndication),” said

Koretzky.

“There are a bunch of deals that (were)

signed before the coronavirus crisis began and

in light of banks’ funding obligations once all

closing conditions are met, some may have to

go to market soon, unless banks decide to hold

the debt on their books for longer, hoping the

market improves.”

Aaron Weinman

9 IFR Loans 2327 p 75 - XX.indd 90 03 / 04 / 2020 19 : 26 : 37