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LPC: Love-hate reception for US leveraged loans
May 19, 2017 / 4:19 PM / in 7 months

LPC: Love-hate reception for US leveraged loans

NEW YORK, May 19 (Reuters) - Companies with strong earnings and good trading track records, including telecommunications provider CenturyLink and food company Post Holdings, are tapping the US leveraged loan market at ever-tighter spreads as investor demand remains strong for floating rate assets.

At the same time, similarly-rated issuers such as nutritional supplement maker GNC and lift trucks maker Hyster-Yale are facing higher pricing as lenders demand better economics for taking higher risk in weaker sectors.

This split is emerging in the highly liquid US leveraged loan market despite strong demand as investors try to protect their portfolios against late cycle credit risk and poke holes in deals that are potentially vulnerable to a downturn.

“Job number one for institutional investors in credit markets is to avoid big losers,” a senior banker said. “Credit analysis 101 tells analysts and portfolio managers that where they see smoke it can lead to fire. Selling a loan at 80 cents … offsets dozens of successful loan purchases that are performing well.”

Times could not be better for issuers with strong track records, especially for the biggest, most liquid loans. Demand has been stoked by 27 consecutive weeks of inflows to loan funds, which have added a total of approximately US$15.8bn to the retail market this year alone, according to Lipper.

CenturyLink proved so popular that it increased the size of a proposed term loan this week to US$6bn from US$4.5bn and lowered pricing on the Bank of America Merrill Lynch-led deal to 275bp over Libor from guidance in the 300bp-325bp range.

The deal backs the company’s acquisition of telecommunications company Level 3, and the increase allows the company to replace a proposed offering of secured notes.

Post Holdings also increased the size of a Credit Suisse-led term loan backing its purchase of Weetabix to US$2.2bn from US$2bn. The additional funds allowed the company to lower the amount of the balance sheet cash used to back the Weetabix purchase and a tender offer. The loan was rated Baa2/BB-.

The company also cut pricing to 225bp over Libor from guidance of 250bp over Libor during syndication, which is the lowest pricing seen on a loan from a B2/B rated issuer this year, according to Thomson Reuters data.

“Investors are pricing the risk,” said a senior banker. “And the risk is much, much higher for story deals than Post. Post is probably misrated in the minds of most investors as well. Most look at it as a double-B type credit given its stability.”

EAGER FOR DOUBLE B

Investors have been eager to pick up double-B paper such as pet food maker Blue Buffalo, which this week firmed pricing at 200bp on a US$400m term loan. The deal includes a 25bp leverage-based stepdown. The company is issuing the loan at par as opposed to the originally proposed discount of 99.5. Citigroup leads the transaction.

Pricing is still diverging in this ratings bracket despite strong demand. Hyster-Yale is paying 400bp over Libor for a US$200m term loan despite being rated slightly higher by the agencies than Post.

The corporate rating is B2/B+, and the facility is rated B1/BB. However, pricing on the Bank of America Merrill Lynch-led deal came in lower than the originally suggested range of 425bp-450bp.

“You’ve got situations where we don’t agree with the ratings agencies,” a portfolio manager said. “Look at Hyster-Yale. It’s double-B, but it’s the fifth player in a highly cyclical industry. It’s not a bad business, but it’s not a double-B business that deserves tight pricing. We’ve seen those types of businesses get into trouble.”

Some companies are finding the proposed pricing too expensive. GNC ended up pulling a proposed extension of its term loan on May 11 after the company could not get the deal done with the proposed coupon of 450bp.

Coronado Coal is another issuer in a tricky sector that has seen pushback from investors. The company is lining up a US$200m loan via Bank of America Merrill Lynch to back a dividend and saw pricing set at 700bp over Libor with the discount widening to 97 from 98.5.

Although the deal carries high pricing, it is an improvement from last year. The company would have been unable to tap the market in 2016, a banker said, as investors were wary of any deals with energy exposure as commodity prices such as oil and coal plummeted.

Coal companies began testing the water in the first quarter as Arch Coal priced a US$300m term loan at 400bp over Libor. Pricing tightened from guidance of 450bp as the deal went to market after coal prices climbed more than 50% from October 2016.

“When the market is hot, inevitably you are going to get deals that push the limits on leverage and structure and pricing,” said Thomas Hauser, a senior portfolio manager at Guggenheim Investments. “Credits that couldn’t get financed in markets with a lesser tailwind try to price their deals because of insatiable demand.” (Reporting by Jonathan Schwarzberg and Andrew Berlin; Editing By Tessa Walsh)

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