NEW YORK, Sept 6 (LPC) - What a difference a year makes.
Loans backing US leveraged buyouts (LBOs), including a US$500m term loan for the Carlyle Group’s acquisition of ship repair services company Vigor Industrial and a US$755m first-lien loan supporting Thoma Bravo’s purchase of data provider J.D. Power Associates, are expected to garner demand throughout September, among other debt financings. But this year’s post-Labor Day pipeline is unlikely to stir the market in the same way as last September's jumbo-sized LBOs.
This month, US investors have instead set sights on smaller-sized, but higher-quality leveraged loans from recognizable sponsors and borrowers. The marketplace is preparing for new transactions as concerns mount that a slowdown in global growth could trigger an economic recession.
“After 10 years of expansion, investors are asking when we see a retrenchment,” said Jonathan Insull, managing director at Crescent Capital. “There is caution out there and selectivity (from investors).”
Leveraged loan buyers throughout August banked on familiar, double-B rated companies, such as foodservice distributor US Foods and waste management firm US Ecology, which raised in August US$1.5bn and US$450m in debt, respectively, while computer manufacturing giant Dell launched on September 5 an investment grade-rated US$4bn loan. Conversely in August, five leveraged firms withdrew transactions from the syndicated loan market as investors grew wary over lesser-known companies attempting to raise debt during the summer slowdown.
“Given the backdrop of later-stage cycle behavior, investors gravitate towards seasoned, tested businesses,” said Frank Ossino, senior managing director and portfolio manager at Newfleet Asset Management. “These might be market leaders, businesses with competitive advantages or management teams that have managed with leverage in the past, rather than trying to pick a storied, or new credit, at this stage.”
As US recession fears mount, just US$52bn in US syndicated loans sat in the pipeline at the end of August. New loan issuances have slowed as wider concerns such as Brexit uncertainty grew and the US-China trade war ramped up. Investors too have opposed some transactions saddled with excessive leverage or aggressive documentation, particularly from borrowers hamstrung by cyclical industries.
“We have seen more investors decline transactions perceived as over-levered or loosely structured for issuers in less-predictable sectors of the economy,” said Jeff Cohen, managing director and global head of leveraged finance capital markets at Credit Suisse. “If the economic picture for the next several quarters was clearer, there would likely be less sensitivity regarding cyclically-exposed issuers.”
Moreover, managers of leveraged loans most prominent buyer, Collateralized Loan Obligations (CLOs), are growing cautious as they tackle the higher cost of capital as spreads remain wide on Triple A rated paper. The average spread on broadly syndicated Triple A debt, for example, has jumped from roughly 120bp-125bp in August 2018 to approximately 140bp a year later, LPC Collateral data showed.
Total CLO issuance, while healthy, has also softened to roughly US$81.6bn from January 2019 through August, from US$91.7bn for January 2018 to August 2018, according to the data.
As CLO managers assess the greater cost of capital for Triple A rated debt, they may also look for a higher spread in leveraged loans to justify the arbitrage play between the two asset classes.
In September 2018, multi-billion dollar financings, such as a US$5.45bn loan funding KKR’s purchase of Envision Healthcare, Refinitiv’s US$13.5bn LBO backing Blackstone’s purchase of Thomson Reuters’ financial and risk business or Akzo Nobel’s US$7.6bn debt financing supporting Carlyle’s acquisition of the chemicals business, whet investor appetite within five days after the 2018 Labor Day holiday in the US, indicating insatiable demand for floating-rate debt at the time.
Approximately US$280bn in syndicated leveraged loans were completed in the US during the fourth quarter of 2018, after US$340bn were completed for the same period in 2017, according to data from Refinitiv LPC.
Twelve months on, however, investors have grown disciplined after 42 consecutive weeks of outflows from loan funds and concerns about lower interest rates in the US.
Despite the changing market backdrop, underwriters are confident September will live up to its billing as one of the year’s busiest months.
Less than four days after the Labor Day break, digital imaging firm Shutterfly is weighing a US$2.085bn debt package backing its acquisition by Apollo, while plasmid DNA supplier Aldevron, UK-headquartered software firm ACS and electronics manufacturer Sensata Technologies have outlined terms for potential leveraged loans. Together, these four offerings equal more than US$4bn in first-lien term loan debt, and much more is expected this month, sources have said.
“The supply-demand backdrop is relatively balanced, certainly not overheated,” added Cohen. “Investors have recharged and September is an ideal time to issue.” (Reporting by Aaron Weinman. Editing by Michelle Sierra and Leela Parker Deo.)