NEW YORK, July 11 (LPC) - US middle market loan pricing is increasing at a slower rate than the larger US leveraged loan market, where assertive investors with more deals to choose from are winning concessions on pricing and documentation.
Capital remains abundant in middle market lending and fewer lenders are needed to finalize smaller loans, leading to a smaller 25bp increase than the large cap market, which is adjusting some deals by more than 75bp.
“Libor spreads on middle market loans have widened by about 25bp. Pricing is roughly 450bp over Libor plus or minus 25bp,” a middle market investor said, while another said that pricing was averaging 400-450bp.
“There is more pricing variability in the broadly syndicated market right now,” the first investor said.
The second quarter was the first time that average middle market spreads had widened since hitting 527bp in the third quarter of 2016, Thomson Reuters LPC data shows.
Spreads tightened every quarter subsequently to 411bp in the first quarter of 2018 before rising to 417bp in the second quarter of this year.
The upper end of the US middle market is seeing similar dynamics to the broadly syndicated market in recent weeks. Some rated, covenant-lite deals aimed at US institutional investors including Collateralized Loan Obligation (CLO) funds have run into resistance and flexed pricing higher as a result.
Financial software platform MeridianLink Inc increased pricing by 50bp on the term loan portion of a US$350m credit that funds private equity firm Thoma Bravo's acquisition and merger of the company with divisions of CRIF Lending Solutions.
The US$315m, seven-year covenant-lite term loan priced at 400bp over Libor on July 2 with a 1% floor and a stepdown to 375bp at net first-lien leverage of 4.25x, 50bp higher than guidance of 350bp. The 99.5 original issue discount was unchanged but soft call protection at 101 was extended to 12 months from six. Antares Capital led the transaction with joint lead arranger Golub Capital.
B2/B rated marketing services platform HALO Branded Solutions Inc also sweetened pricing in late June and shifted US$25m to the second-lien portion of a proposed US$420m buyout facility. TPG Growth is purchasing the company from Audax Private Equity. Antares Capital led the financing alongside SunTrust, Citizens and KKR Financial.
The transaction included a US$270m first-lien component, which was reduced from US$295m previously, and a US$100m second-lien tranche versus an original target of US$75m. The deal also included a US$50m revolving credit facility.
Pricing on the first-lien debt widened to 450bp over Libor with a discount of 99 versus guidance in the 375bp-400bp over Libor range with a discount of 99.5. The second-lien loan priced at 825bp over Libor with a discount of 98.5, increased from 800bp over Libor with a discount of 99.
Market participants expect pricing to move up on the margin in the middle market, as demand remains strong and new and existing platforms continue to raise fresh capital.
Expansive growth in the middle market lending base means investors can now make substantial commitments and only a handful of lenders are required to fund a typical US$200m deal. Investors that were able to commit US$25-US$30m in the post-crisis period can now hold more than US$100m each.
This is creating more pricing stability than the broadly syndicated market, where executing deals relies on attracting the last dollar, leaving arranging banks exposed to greater pricing variation after investor pushback.
Continued competition for assets means that investors are still buying midcap deals, but some are calling for higher pricing and resisting further price cuts.
Spice World, a garlic and spice company, is in market with a US$245m credit backing the company’s sale to Palladium Equity Partners.
The BMO-led deal includes a US$45m revolver and a US$200m term loan and is already oversubscribed with pricing of 425bp over Libor and a 25bp stepdown, sources said. Senior leverage is 4.3x and total leverage, including US$60m of mezzanine debt, comes in at 5.6x, sources said.
While the company's dominant market share was attractive, two investors said, both decided not to lend due to the deal's low pricing.
Automotive technology provider OEConnection (OEC) closed a deal in late June that successfully increased the size of its term loan by US$25m to US$325m.
However, the company had to drop a proposed repricing and leave pricing unchanged at 400bp instead of cutting it to 350bp as originally proposed. (Reporting by Leela Parker Deo Editing by Tessa Walsh and Lynn Adler)