May 25, 2017 / 2:04 PM / 4 months ago

LPC-Leveraged loan lenders lament latest pricing slump

LONDON, May 25 (Reuters) - Recently repriced loans for French glass bottle maker Verallia and Swedish home alarms company Verisure have surprised Europe’s leveraged loan bankers after trading above par in the secondary market.

Both loans repriced to 300bp earlier this month and have since traded up on the break to as high as 100.6 for Verallia and 100.4 for Verisure.

The strong secondary levels contrast with loans for medical laboratory services operator Cerba Healthcare and Swiss medical diagnostics company Unilabs that repriced to 300bp in March and traded lower on the break below par, after investors pushed back against the low interest margin.

An interest margin of 300bp is the lowest pricing seen in Europe’s leveraged loan market for Single B issuers since the financial crisis and was too low for many investors in March, prompting resistance from investors. Since then, pricing has risen as bankers and sponsors avoided pricing anything at that level in order to ensure investor support.

Therefore, the return and subsequent success of the recent repricings at the 300bp level has surprised many in the market, especially for a credit such as Verallia, which is not perceived to be as strong as Verisure, bankers and investors said.

“It is just madness. I can’t believe these repricings got done at 300bp. Investors are idiots and can’t afford market discipline,” a capital markets head said.

Both deals are sizeable and investors -- many with large tickets -- were reluctant to say no to the repricing requests to avoid the risk of removal from the deal and being repaid at a time when there are so few new money deals to park cash in.

“Guys don’t want to get €50m back. They are big tranches and investors hold a lot of it. Both are good credits and there is nowhere else to put money now,” a head of leveraged finance said.

Market sentiment has also improved greatly since March, with the market reacting positively to the outcome of the French elections.

“Nervousness around the French elections has fallen away. Economic data out at the moment is relatively positive, the stock market continues to perform and as a result of all of that, market confidence high,” a second head of leveraged finance said.

Notwithstanding localised blips such as the UK election, the long term trend remains that yield is being compressed, which is pushing money further down the credit spectrum and compressing yields there, a senior banker said.

POPULAR MOVE Borrowers are taking advantage of the hot market conditions to line up repricings in anticipation of soft-call ending. Verallia’s newly repriced loan will kick in come June when current soft-call from its previous repricing ends.

Borrowers are looking to secure better terms on deals while they can, before a perceived windfall of event-driven financings hit the market in June. Any credit that has soft call ending within a 4-6 week period will be targeted as a potential repricing candidate.

German perfume and cosmetics retailer Douglas is deemed as a next repricing, given soft call ends around July.

“Borrowers are planning in advance and repricing credits early that will come into effect once soft-call ends. They are taking advantage of hot markets and lining everything up in case, simply because they can,” an investor said.

New issues, such as UK-based Element Materials Technology’s acquisition of listed British laboratory-based testing firm Exova Group; German drugmaker Stada; and publicly-listed Hong Kong-based international schools operator Nord Anglia Education are expected to come with a new issue pricing premium that could focus investors away from unpopular repricings.

“As soon guys have more options they are going to be selling the Verisures and Verallias that pay 300bp and buying new paper paying more. It is like a deposit account, it is temporary, like a short term home for cash,” the first head of leveraged finance said.

However, even a pricing premium on new issues could fail to produce the higher yields investors have been waiting for. Element’s US$720m tranche and €204.2m tranche are guided to pay 350bp-375bp over Libor with a 1% floor and a 99.5 OID, and 350bp over Euribor with a 0% floor and a 9.5-99.75 OID, respectively.

“The French elections didn’t produce a surprise and that means risk is on again and maybe that means pricing will come even tighter. 350bp on new paper is tight,” the investor said.

TIGHTER STILL The question is how much tighter the market will be able to go. This year, despite initial reluctance, the market accepted deals with a three handle and pricing tumbled within a short space of time below 400bp to 375bp and eventually to 300bp.

Now there is some nervousness, especially from CLO investors, that a punchy sponsor could attempt 275bp on a strong Single B loan.

“It is just a matter of time before 275bp comes back. Unless we say CLOs don’t work then pricing doesn’t make sense. There is a mismatch in the market. Famous investor discipline is holding out again -- sorry was that sarcasm,” a third head of leveraged finance said.

If enough investors opt to sell out of tightly priced credits once new issue comes to the market, secondary prices could start to compress, which could attract people back to buying in secondary again. (Editing by Christopher Mangham)

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