August 22, 2019 / 9:28 PM / 4 months ago

US leveraged loan market pauses as recession fears mount

NEW YORK, Aug 22 (LPC) - Mounting indicators of a recession and rising global geopolitical tensions are spooking investors, as new launches of leveraged loans grind to a halt amid a summer lull.

Weak economic data from Europe and China, the impact of the US-China trade war and the recent inversion of the three-month and 10-year US Treasury yield curve have heightened the potential for an economic recession in the US in the next 12 months.

Higher market volatility and investor prudence has also made it harder for arranging banks to syndicate loans for riskier, higher-leveraged and lower-rated companies in recent weeks.

A US$250m loan for un-rated marketing company Golden Hippo and a US$129m incremental loan for B rated midstream oil and gas company Glass Mountain Pipeline were pulled from the market earlier in August, with the latter firm opting for an equity injection from its sponsor BlackRock.

B2/B rated Life Time Fitness withdrew a proposed US$500m loan earlier this week, single-B rated media software firm Vewd also held back a US$125m offering and power plant operator Chief Power called off a US$380m transaction.

Some, however, attribute the stalled deals to the summer slowdown, and renewed discipline from investors increasingly wary of levered, single B-rated borrowers.

“Are there signs of stress in the economy, unquestionably,” one credit portfolio manager said. “But these (pulled transactions) were marginal deals in marginal sectors. Difficult deals are always going to struggle in late August.”

Stronger borrowers are facing fewer hurdles in getting their loans over the line. Foodservice distributor US Foods, rated Ba3/BB+, raised US$1.5bn on August 15 at just 200bp over Libor and Ba3/BB rated waste services firm US Ecology on August 14 sold a US$450m loan at 250bp and a discount of 99.75.

“Investors are being more selective. Managers are being cautious and acting prudently. This is actually a good thing to see," a second portfolio manager said.

Riskier lower-rated companies, such as single B rated genealogy website Ancestry.com, are having to make concessions to get deals over the line. The company finalized a B2/B rated loan at 425bp over Libor, higher than guidance of 400bp and a discount of 99 cents.

Ancestry.com also implemented lender-friendly changes to the documentation of the seven-year loan, extending the most-favored nation (MFN) sunset – a provision that resets the yield on an existing loan to that of any new one – to 24 months of the life of the loan from 18 months.

Other single-B rated borrowers, including chemicals firm Ineos and security company Total Safety, also adjusted MFN clauses on recent loans in August.

CALM BEFORE THE STORM

As the market takes a breather, deal makers are waiting for the next round of transactions to be launched after the Labor Day holiday in the US in early September.

Approximately US$42bn in leveraged loans, along with roughly US$35bn in non-leveraged transactions was in the pipeline in mid August, according to Refinitiv LPC data, and sources expect a large chunk to hit the market in September.

Acquisition financing, including the merger between telecommunications firms T-Mobile and Sprint, will be highly sought-after paper, while a poossible debt deal to support private equity firm Siris’ purchase of US TelePacific Holdings will also generate investor interest, sources have said.

Equipped with billions of dollars from institutional term loan repayments received through July and August from split-rated borrowers such as Ba1/BBB- rated casino company Las Vegas Sands, investors are keen to redeploy this capital into similarly-rated opportunities.

FLIGHT TO QUALITY

As investors’ flight to quality intensifies the growing divide between BB and single-B credits, bankers are using the slow new issue week to determine appropriate price points for borrowers.

"Right now, banks' focus will be figuring out what levels they can launch deals at for next month," a third manager said.

The average spread for BB rated loan issuers over the last three months was approximately 335bp over Libor, and single B companies averaged 403bp in the same period, according to Refinitiv LPC’s pricing grid.

Investors are also lobbying for greater lender protections in loan documents to sure up their credit investments if the economy turns towards a potential recession.

"Appetite for B3-rated loans is just not as robust, so there is a separation among credit. Things the market likes will clear at tight levels, but other borrowers will take concessions," the second portfolio manager said. (Reporting by Aaron Weinman. Editing by Tessa Walsh and Michelle Sierra.)

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