NEW YORK, May 15 (Reuters) - Burger King Worldwide Inc is the latest and largest company to jump on the repricing and refinancing bandwagon in the US leveraged loan market, but this time the company has thrown in a high-yield bond refinancing to lock in low interest rates before they rise.
Excess demand from loan investors has allowed many US, European and Asian companies to reprice and refinance in the US leveraged loan market since mid April, when financial trading communications provider IPC led the charge by cutting 100bp from the margin of a US$595m term loan that it arranged only in February, and added an extra US$15m.
In the years following 2007’s financial crisis, hundreds of billions of dollars of leveraged loans were refinanced with high yield bonds. The trend slowed this year, however, as loan pricing fell.
Although rates are broadly similar in the loan and bond markets, companies have favoured loan repricings and refinancings this year which are currently cheaper than bonds and allow them to repay debt faster without bond-style call protection.
“I would say generically that it’s a fair fight between the two asset classes right now,” said Jonathan DeSimone, a managing director at Sankaty Advisors in Boston, adding that a lack of new loan supply is currently giving the asset class a slightly better technical outlook than bonds.
“On the primary side, there’s probably a slight edge to loans. From a pure secondary to secondary standpoint, I think there is probably a slight edge to high-yield,” he said.
The rapid approach of a rise in US interest rates is prompting some companies to consider loan to bond refinancings again to secure low long-term interest rates and satisfy bond investors’ demands for new paper.
Burger King is repricing some of the US$6.75bn term loan that was arranged in September 2014 to finance its acquisition of Canadian quick service restaurant chain Tim Hortons.
The burger chain is also refinancing US$1.55bn of its existing loan with the proceeds of a US$1.25bn notes offering and cash. The 6.5-year senior secured notes priced at par to yield 4.625% last Thursday.
Burger King is hoping to reprice the remaining US$5.14bn of term loan debt at 275bp over Libor, down from 350bp over Libor which it paid in September.
Both the loan and the notes are senior and secured, which makes them equally desirable from an investor’s point of view. As the terms are broadly similar in both markets, investors are therefore focusing on credit more than structure, industry insiders said.
“That is a very solid issuer,” said an industry source. “It’s below investment grade, but it’s a business that’s been around for decades. I suspect we will be interested in both.”
Mining company Petra Diamond Ltd also sold US$300m of five-year notes to pay down some of its senior secured debt earlier in May.
Research and sales services provider Quintiles Transnational Holdings Inc also refinanced an existing credit with US$800m of notes, a US$500m term loan B, a US$750m term loan A and a US$500m revolver in May.
While treasurers and chief financial officers are ready to jump at potentially the last chance to issue bonds before a rates rise, giving up the ability to prepay loans in return for locking in low long-term rates is a tough call.
“Being a corporate treasurer is not different from your personal mortgage,” said Jonathan Insull, a portfolio manager at Crescent Capital. “You smell the rates are going to go up and really want to make sure to lock up the rates while they’re still low.”
The issue, as ever when refinancing, is whether borrowers want to give up the ability to prepay loans in return for nailing down low interest rates for the life of the debt.
Most US leveraged loan issuance this year has come from repricings and there is more to come. Of the US$32bn forward calendar for loans, US$24bn is for repricing, DeSimone said.
Limited opportunity to lend to new money deals has driven primary loan spreads down. Investors are also having to keep a close eye on loans that could reprice through soft call protection at 101, or at par after call protection expires, to avoid losing money.
High-yield investors are clearly more concerned about the US interest rate environment than they were as higher interest rates will push bond prices down, DeSimone said.
Additional reporting by Michelle Sierra. Editing By Tessa Walsh/Jon Methven