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LPC: Weak loan supply allows borrowers to push out maturities

| NEW YORK

NEW YORK Oct 6 A lack of new loan issuance and heavy demand for leveraged loans has created opportunities for issuers with strong credit profiles to increase the size of new refinancings by huge sums, extend maturities and lower borrowing costs.

Low M&A volume means banks are looking for ways to boost fees before the end of the year. With interest rates remaining low, companies such as pharmaceutical investment firm Royalty Pharma and advertising tracking firm Nielsen are taking advantage of investor demand by doubling or tripling the size of their deals.

Overall US leveraged loan volume of US$555bn was down 11% in the first nine months of the year compared to the same time last year. Of this, just US$203bn was tied to merger and acquisition activity, enabling companies to be more aggressive in pricing for the available loans investors are competing to buy.

"Companies that people know and like are getting wildly oversubscribed," said a senior investment banker.

Loan funds have seen strong inflows as Libor has ticked up to above 80bp. With many leveraged loans having Libor floors of 75bp, this has effectively made loans floating rate again. In a rising interest rate environment, a Libor spread that can go up when rates hike is an attractive quality to both loan funds and high yield funds.

"I think we'll have a lot of opportunistic refinancing," the banker said.

TAKING ADVANTAGE

As the attractiveness of leveraged loans grows, loan buyers have been clawing to put anything on their books that comes to the market, even the traditionally unpopular refinancing and repricing deals that can eat into spreads. This has worked out well for borrowers such as Royalty Pharma and Nielsen, which have extended the maturity profile on their loans at low rates.

Royalty Pharma more than tripled the size of its refinancing to US$3.4bn from US$705m, while Nielsen almost quadrupled its refinancing loan to US$1.9bn from US$500m. In both cases, the companies will be able to extend their maturity profile with the additional demand from investors.

The strong appetite has not been arbitrary as investors are still disciplined and issuers with a checkered past or without a strong borrowing history are not getting signed up without paying a premium.

Redbox widened pricing on a US$400m term loan backing its buyout by private equity firm Apollo Global Management to 750bp over Libor with a 1% floor and a discount of 97 cents on the dollar versus guidance in the 725bp-750bp over Libor range with a discount of 98.5 cent.

Video conferencing equipment maker Polycom was also forced to price its US$750m term loan at a discount of 96 cents on the dollar with the coupon widening to 650bp over Libor with a 1% floor from guidance of 575bp over Libor.

"We've had other markets where good deals go well and things with any noise don't go at all. The market right now is healthy enough to get deals done, but it's not so overheated that harder deals are pricing with no discrimination," the banker said.

"They're getting priced, but they're getting priced wider. There's still some choosiness. I wouldn't put us in a bubble context at all." (Reporting by Jonathan Schwarzberg; Editing by Michelle Sierra and Lynn Adler)

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