| NEW YORK
NEW YORK Oct 4 Syndicated loan investors wary
about the uncertain macro-economic environment are keeping a
disciplined approach when buying loans, pushing back on pricing
for the riskier leveraged credits, even as the need to put money
to work eclipses the number of loans available.
General uncertainty about how soon or how much the Federal
Reserve will raise rates, concerns about future corporate
earnings and the US economy, as well as overall incertitude
about the looming US elections, are making investors more
careful before allocating cash into the riskier part of the
leveraged loan market, which is considered speculative and rated
BB/Ba or lower.
A Goldilocks backdrop for leveraged loans has led to a raft
of issuer-friendly deals, such as repricing of spreads, adding
leverage and debt-fueled dividend payments to owners.
Nonetheless, when marginal credits come to market, loan
investors are being disciplined and pushing for better pricings
"The strong demand is still focused on relatively better
credits," said Steven Oh, global head of credit and fixed income
DEMAND IN LOAN LAND
Economic policy decisions from global central banks and a
more than three-year long regulatory overhaul on risky lending
are the main causes of the burgeoning demand for loans, the
tight supply, and the sense of caution in the leveraged loan
space, said sources.
Low interest rates around the globe have pushed investors to
seek the higher yields of risky corporate debt, while the
Federal Reserve's impending rate hikes and the Securities and
Exchange Commissions' money market reform have pushed Libor up,
increasing the demand for floating rate loans which pay a spread
over the benchmark. Meanwhile, regulators have clamped down on
how much debt banks can place on below-investment grade
companies, muting the supply of leveraged loans.
Interest rate hikes can mean ensuing volatility in risk
markets, and this foresight has infused loan investors with
apprehension over poorer credits. While loans are floating rate,
they can trade down in correlation to fixed income products and
are especially prone to selling by investors who hold both
leveraged loans and high-yield bonds.
"Nervousness over macroeconomic concerns is keeping
discipline on credit," said a loan trader. "There is more
caution in the air post-Labor Day than in the summer."
A number of loan deals have struggled to finish as investors
push back on lender-friendly pricing, even though average bids
in the overall secondary market climbed to above 97 this week,
the highest level in a year, according to LSTA/Thomson Reuters
LPC Mark-to-Market Pricing.
Lower-rated new transactions are particularly prone to
pushback. Video conferencing equipment maker Polycom Inc's
US$750m term loan, funding the company's buyout by Siris Capital
and rated B1, was forced to widen its original issue discount to
96 from 98, reduce the size from US$800m and increase the spread
to 650bp over Libor from 575bp over Libor, as well as extend 101
soft call protection to one year from of six months.
Dell Software Group's US$1.35bn term loan, backing the
company's acquisition by Francisco Partners and hedge fund
Elliott Management and rated B1, also hiked the spread to 600bp
from 550bp and lengthened 101 soft call protection to one year
from six months.
Redbox Automated Retail's new US$400m term loan, funding the
video kiosk company's sale to Apollo Global Management and rated
Ba3, cut the new issue discount to 97 from 98.5. Printing
services company LSC Communications' new US$375m term loan B,
which backs the company's spin-off from RR Donnelley, reduced
from US$425m, raised the spread to 600bp over Libor from a range
of 525bp-550bp, slashed the discount to 97.5 from 98.5 and
shortened the maturity to six years from seven years.
Loans already trading in the secondary market are also
seeing the impact of macroeconomic-induced prudence, moving
lower following bad credit news as investors sell-off amid
heightened wariness of hazards.
Pharmaceutical company Concordia International's secondary
term loan took a multiple-point hit to 90-92 on September 16,
weighed down by the UK government's attempt to curb drug costs.
Luxury department store Neiman Marcus Group's term loan dropped
a point to 93-93.75 last week after reporting weakening sales
and wider losses for the fourth quarter.
So far, investors have pushed back and been compensated for
holding riskier loans. But loan watchers fear that if the
supply-demand imbalance persists, their discipline may fold.
"There are marginal credits entering the loan space. To
date, there has been some measure of discipline. The concern is
that if the current technicals continue, transactions that
should not be cleared could enter the marketplace," said Oh.
(Reporting by Lisa Lee; Editing By Michelle Sierra and Leela