NEW YORK, Aug 8 (LPC) - Billions in loan repayments are set to leave US investors flush with cash in a market that continues to grapple with a low supply of new deals, further splitting appetite toward highly rated transactions while lower-rated borrowers struggle to get loans done at their original terms.
Some US$26bn in institutional loan repayments trickled back to investors throughout July, according to S&P, including paydowns from BB- rated First Data and Ba1/BBB- rated resort developer Las Vegas Sands, among other higher-rated borrowers.
“These prepayments are high-quality paper, which large mutual funds, (exchange-traded funds) ETFs, and (Collateralized Loan Obligations) CLOs to a lesser extent will need to replace,” said Ryan Kohan, a leveraged loan portfolio manager at Western Asset Management.
With split-rated money returning to investors’ hands, the primary loan market is likely to further bifurcate as fund managers will prefer to recycle this capital among higher-rated borrowers.
“These loan repayments are relatively good credits, so as an investor you can’t just buy any credit. There are other factors like ratings constraints,” said Lee Shaiman, executive director at the trade group Loan Syndications and Trading Association.
New issuance has cooled off after a busy July. To date, about US$25bn in new money has been logged in leveraged loans this quarter, according to data from Refinitiv LPC. The uptick follows just US$89.4bn raised in new issuance for the second quarter, significantly down from US$124.8bn raised during the same three-month period a year earlier.
Amid the bifurcation, two borrowers – advertiser Clear Channel Outdoor (CCO) and retailer Claire’s Stores – face sterner tests with loan investors. And despite the spike in repayments, both may not benefit from renewed investor liquidity.
The loan repayments “will not support more difficult deals,” added Kohan. “The appetite will be for higher-rated paper.”
CCO and Claire’s, fresh from bankruptcy, are refinancing debt this month and offer contrasting stories, with one portfolio manager describing the loan transactions as “A Tale of Two Cities” scenario, alluding to the Charles Dickens novel of the same name.
CCO is offering investors price guidance of 350bp-375bp over Libor for a US$2bn term loan B, rated B1/B+, and while investors appreciate the company’s projected cash flow, its pro forma leverage of roughly 8.5 times is a tough pill to swallow.
The billboard advertiser, however, has started chipping away at its US$5.3bn debt pile, using proceeds from a July share offering to redeem roughly US$334m in bond debt. Investors too, are confident that CCO’s leverage-neutral TLB will clear within the suggested range.
CCO was carved out of former parent iHeartMedia in May as part of a bankruptcy restructuring, and the TLB represents a massive win for the company. The move by the advertiser will extend debt maturities, reduce its annual cash interest burden by roughly US$30m and bolster free cash-flow generation, according to Fitch Ratings.
“Clear Channel is a well-known issuer and everyone invested in it understands its cash-flow potential,” the portfolio manager said.
Investors have until 5pm in New York Thursday to commit to the CCO loan.
Claire’s, conversely, was hit hard like many of its retail peers, which have struggled to adapt to higher storefront rents, less mall traffic and competition from online shopping.
The accessories retailer is after a US$700m TLB to redeem preferred equity and refinance a US$250m loan obtained following the company's bankruptcy filing in March 2018.
The B rated seven-year loan is offering investors a much higher spread at 550bp over Libor compared to other single B credits in the market, but lenders must grapple with the negative stigma of brick-and-mortar retail.
“Claire’s is a difficult story and a retailer that has been in decline, and given it’s mall-based, that’s a double whammy,” said a second portfolio manager.
Claire’s, which is owned by Apollo Global Management, is expected to lower its leverage by the end of 2020 to the low-4.0 times area from about 4.7 times when the transaction closes, if the new TLB is successful, according to S&P.
And having the backing of Apollo can’t hurt either. The private equity giant is no stranger to loan investors, having priced tough deals for other portfolio companies such as grocery store Smart & Final and chemicals firm Hexion in June.
“(Apollo) has a lot of clout, and when you’re in a market that is generally OK, a company like that can push things through and get terms others may not want,” the second portfolio manager added.
Lender commitments on Claire’s new loan are due August 14. And even at 550bp over Libor, the transaction reduces interest payments for the company from the 725bp over the benchmark it pays for the US$250m loan.
Calls and emails to spokespeople at both companies were not returned.
Reporting by Aaron Weinman. Editing by Michelle Sierra and Kristen Haunss