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LPC: Corporate borrowers rush to refinance despite weaker market
November 17, 2017 / 4:56 PM / in 24 days

LPC: Corporate borrowers rush to refinance despite weaker market

NEW YORK, Nov 17 (Reuters) - US companies are rushing to complete opportunistic refinancings and repricings in the leveraged loan market as slumping secondary prices reflect turbulence in the high-yield bond market and indicate a possible pricing correction in loans.

The market has seen a fresh wave of repricing deals in recent weeks as companies seek to take advantage of near-perfect market conditions to reduce their borrowing costs.

At least 18 US companies launched or completed repricings this week, including a US$2.5bn term loan for domain name provider GoDaddy and a US$2.2bn deal for foodservice distributor US Foods.

These deals ran into wider market volatility, as secondary prices fell to 98.78 this week from 98.96 on November 1, according to Thomson Reuters LPC data, after some big firms including communications provider Frontier Communications released disappointing third quarter earnings.

Several companies, including Go Daddy and 84 Lumber, hiked the interest margins to help their loan repricings to clear the market as outflows from the US high-yield bond market accelerated and hit US$4.4bn for the week of November 15, according to Lipper, the biggest week of outflows since 2014.

GoDaddy increased pricing to 225bp from 200bp on a loan that initially priced at 250bp over Libor in February and financed its acquisition of Host Europe Group. Pricing was also increased by 50bp to 450bp on a US$360m credit for engineering services firm Michael Baker on Friday.

Pricing also was increased on a US$343.3m term loan for building product supplier 84 Lumber to 525bp over Libor from 475bp and a US$150m add-on for transportation and logistics provider Daseke also saw a 25bp increase to 500bp over Libor from 475bp.

The high-yield wobble started with strong supply and weakening company earnings, but selling picked up after banks including Goldman Sachs, JP Morgan and Morgan Stanley warned that the US is late in its credit cycle and advised reducing allocations to the asset class.

“There’s been a drumbeat of disappointing earnings and those misses are adding up,” a loan investor said.

The asking price on Frontier Communications Corp’s term loan due in June 2024 fell to 94.5 on Monday from 95.7 at the start of November before rebounding slightly later in the week, the data shows.

Frontier released third quarter earnings on October 31 that showed a 10.7% drop in total revenue to US$2.3bn from the same period in 2016.

Hospital operator Community Health Systems’ term loan G due in December 2019 sank to 98.22 on Monday from 98.3 at the beginning of November after the company also reported weaker third quarter earnings on November 1, which included a revenue decrease over last year of 16.3% to US$3.7bn.

Hospital staffing provider Team Health’s term loan due in February 2024 dropped sharply to 96.4 on November 7 from 98.3 on November 1 before bouncing up to trade around 97.25.

Bank of America also attributed the high-yield drop last week to a few specific yet significant names, including wireless carrier Sprint or communications provider CenturyLink. The bank said that half of the high-yield widening from last week was due to just a dozen names in a November 10 research note.

TEMPORARY DISLOCATION?

Strong technical demand for floating rate loans from investors seeking to hedge against rising interest rates inflated secondary prices and 64% of loans trading were trading above par, including 6% of loans trading above 101 on November 15. At the beginning of November, 67% of loans were trading above par.

Falling secondary prices, however, reduce the case for refinancing or repricing, which could slow or stop if high-yield turbulence continues unabated.

Bankers are hoping that the loan weakness will be temporary and the Thanksgiving holiday will give some room for reflection, and help the current wave of repricings to clear the market and even create more deals for early 2018 if investors hold their nerve.

Demand seems to be more robust for new money deals, including a dividend financing for human resources and benefits provider Alight Solutions, which increased a proposed add-on to its term loan to US$205m from US$185m; and renewable generation company ExGen Renewables, which increased its term loan to US$850m from US$750m and cut pricing to 300bp over Libor versus guidance of 325bp over Libor.

Another banker expects that repricing activity will take a breather after Thanksgiving, but could resume in the New Year.

“Repricings will resume in January assuming some stability,” he said.

Additional reporting by Andrew Berlin Reporting by Jonathan Schwarzberg; Editing By Tessa Walsh

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