| NEW YORK, April 10
NEW YORK, April 10 Traditional banks and
alternative lenders are still underwriting highly leveraged US
loans despite regulatory scrutiny as red-hot investor demand
shows no sign of abating and new buyout loans remain scarce.
One third of buyout loans had leverage of more than 7.0
times in the first quarter of 2017, according to Thomson Reuters
LPC data, despite US leveraged lending guidelines that were
introduced in 2013 to curb market risk by subjecting loans with
leverage of more than 6.0 times to greater scrutiny.
This is the highest leverage level since 2014, when 40% of
deals were highly leveraged. Only 2007 saw higher levels, when
53% of buyouts had leverage above 7.0 times before the financial
crisis, the data shows.
Alternative lenders such as Jefferies and Nomura and direct
lenders such as business development companies from Ares Capital
and Golub Capital are still able to offer higher leverage,
however, as they are not subject to the guidelines, which is
boosting average leverage levels.
Traditional banks are still able to lend with higher
leverage if they are able to satisfy regulators’ criteria.
According to Jefferies data, 90% of deals with leverage of more
than 6.0 times had a regulated bank on them in 2016, which rose
to 91% in the first three months of 2017.
“Hot markets tend to provide issuers and sponsors a higher
margin of error, allowing them to get aggressive in their
interpretation of EBITDA with seeming impunity,” said Michael
Terwilliger, a portfolio manager at Resource America.
High leverage levels are not stopping investors from buying
deals, as the prospect of interest rate increases continues to
boost appetite for higher yielding floating rate senior loans.
B3/B rated insurance brokerage firm USI Inc is in the market
with a US$1.795bn term loan supporting its buyout by private
equity firms KKR and Caisse de dépôt et placement du Québec
which has leverage of just above 8.0 times, according to
Banks are comfortable that the deal will be accepted by
regulators as the company has a track record and is a known
issuer and are viewing leverage as around 6.5 times after
adjustments, a lender said.
The term loan, which launched March 29, is being guided at
325bp over Libor and is being led by Bank of America Merrill
Lynch with KCM, Citigroup and Macquarie.
Software company CCC Information Services’ recent US$1.475bn
leveraged loan also had high leverage in the 7.5 times area, a
banker said, while Moody’s estimated leverage in the mid-8.0
times range. The deal, which included first- and second-lien
loans, was led by Jefferies and Nomura, which are not subject to
the federal leveraged lending guidance.
Despite higher leverage levels, the company was able to
increase a first-lien term loan backing its buyout by Advent
International to US$1bn from US$925bn on March 30. The company,
which is rated B3 by Moody’s, was downgraded to B- from B by S&P
during syndication after increasing the loan boosted leverage to
10 times, according to the agency.
CCC Information Services was also able to tighten pricing on
the deal to 300bp over Libor from guidance in the 325-350bp
range and also priced a US$375m second-lien term loan at 675bp
over Libor after pricing circulated in the 700bp-725bp range.
“Software deals are typically able to support higher
leverage due to stability of cash flows, but it's a bit eye
popping,” said one of CCC’s previous investors who was unsure
whether to lend in the new deal. “(The) new deal is twice the
leverage, same spread. Ugh!”
B3-rated data center operator Cologix was able to price a
US$360m loan at 300bp on March 10 at a pricing level not seen by
the market since 2007.
US leveraged loans are continuing as investors buy floating
rate loans to hedge against further interest rate rises. Last
week was the 21st consecutive week of inflows as demand
continues unabated. Strong investor demand is expected to
encourage regulated and non-regulated arrangers to keep
producing highly leveraged loans, another banker said.
“There is still plenty of active demand, and there doesn’t
seem to be an immediate impetus to slow things down,” the banker
Bank of America Merrill Lynch and Jefferies declined to
(Additional reporting by Davide Scigliuzzo.)
(Reporting by Jonathan Schwarzberg; Editing By Tessa Walsh and