A small flurry of sterling issuers have secured more attractive terms on their leveraged loans in recent weeks, driven by red-hot investor demand heightened by a lack of supply -- all against the background of an uncertain political backdrop as Britain prepares to leave the European Union.
The success of the small wave of deals comes as demand outpaces supply in the European market, prompting an ongoing repricing of euro-denominated loans and making the yield on sterling more attractive to investors. The loans have also been viewed as relatively immune to Brexit-related risks.
The sterling deals include a large buyout financing for British holiday park operator Parkdean, a sterling tranche for Belgian aluminium systems manufacturer Corialis and a string of repricings for UK and Ireland-based cable operator Virgin Media, UK online sports betting and gaming company Sky Bet and US nutritional supplements market Nature’s Bounty.
“They’re easy, really easy,” said one banker. “Virgin Media was a walk in the park.”
Bankers deny there is any rush to bring sterling deals to market before Britain triggers Article 50 and begins its formal exit from the EU at the end of March.
“It’s not tied to Brexit in any way,” the first banker said. “It’s tied to who wants to sit on sidelines watching a great market go by and risk that the market changes for whatever reason in the future.”
A second banker said that the timing was more about borrowers trying to access the favourable terms on offer in the market right now.
“I just can’t make that connection between Brexit and sterling activity,” he said.
The sterling loans in the market have also not come from sectors viewed as more vulnerable to Brexit and price inflation, such as retail or restaurants.
“There hasn’t been anything with front and centre Brexit risk,” a third banker said.
Parkdean was perceived as the biggest test of demand for a large sterling buyout, yet investors flocked to the credit partly as it is a potential beneficiary of Brexit should Brits eschew holidays abroad due to the fall in the value of the pound since the referendum.
“It’s a bit simplistic to say we’ll all be vacationing at home and therefore it will do very well… but yes I think it’s got the right defensive characteristics,” said one loan investor.
The company reverse-flexed its £575m term loan B twice during syndication, knocking the margin down 75bp to 425bp over Libor from initial guidance of 500bp.
For now, sterling borrowers are benefiting from increased demand as investors pour more money into loan strategies in the search for yield.
“It’s total return funds, it’s managed money with lower yield requirements, different swap requirements -- it’s anybody but a structured vehicle like a CLO,” the first banker said.
CLOs drive demand for euro-denominated loans but face swap costs for sterling deals and are therefore not significant investors in the currency.
“There has been an increase in demand from non-CLO lenders,” said the second banker. “They’re attracted to the asset class -- to term loans, not necessarily to sterling -- but they don’t have the same swap requirements as CLOs so they’re more flexible around currency.”
Sterling loans also still pay a premium over their European counterparts – due to the lower levels of liquidity for the currency – which has grown to around 100bp from 50bp-75bp since the referendum.
Corialis, for instance, priced its euro term loan at 375bp while its sterling tranche priced at 475bp.
Even well-liked liquid credits like Virgin Media, a Liberty Global-owned business, priced at 350bp over Libor -- a 50bp premium to its Dutch counterpart VodafoneZiggo’s recent euro offering.
Overall yields on sterling deals will also be higher compared to euro deals as sterling Libor is positive versus negative Euribor.
However, a deal with more obvious risks related to Brexit would potentially encounter more difficulty as investors weigh up the impact on individual credits.
“[Brexit] is very likely to crimp our economy and you want to think carefully about what you’re going into for the long term,” said the loan investor. “Your fundamental risk awareness is higher.”
Yet with the political process still unfolding, the ultimate impact on UK businesses remains unclear.
“There’s theoretical headwinds in the market because of Brexit, you can’t ignore that, but I don’t think anyone can size or put a number on it, or say what’s going to happen,” the first banker added.
“It’s a breeze in the background which may become a gale - or may just blow away.”
(Editing by Christopher Mangham)