March 9, 2018 / 5:15 PM / 2 months ago

Highly rated borrowers drive leveraged loan pricing lower

NEW YORK, March 9 (LPC) - Highly rated US leveraged loan issuers such as packaged foods company Pinnacle Foods and auto parts maker Allison Transmission are taking advantage of strong investor appetite for floating-rate assets to further cut borrowing costs.

First-lien institutional term loan spreads are averaging 337bp in 2018 so far, which takes spreads to their lowest point since 2007, Thomson Reuters LPC data shows. Average spreads for BB-rated issuers are 236bp, versus 363bp for B-rated issuers.

BB-rated issuers are driving the averages down with aggressive deals, as lenders dip below the 200bp threshold that was a no-go even for the highest quality junk-rated borrowers last fall.

More than half of BB-rated first-lien institutional term loans have been priced at or below 200bp over Libor in the first quarter to date, compared with 44% in the fourth quarter of 2017 and only 20% a year ago.

Pinnacle Foods and Allison Transmission launched repricing transactions this week, which are seeking to cut margins to 175bp over Libor from 200bp over Libor on existing loans.

At least four other BB-rated issuers have recently locked in spreads of 175bp. Ba2/BB-rated healthcare services provider HCA repriced its term loan B9 to 175bp in March, and Ba2/BB-rated engineering design firm AECOM and Ba2/BB-rated outdoor advertising company Lamar Media completed refinancings in late February. Specialty chemicals manufacturer W.R. Grace also completed a takeover deal.

UNDER 200

Allison Transmission has returned to the market after an attempt to reprice its term loan to the same level last September ran into investor pushback which led the company to shelve the deal.

That deal was the second to be withdrawn at that time - fixed satellite services operator Telesat Canada also pulled an opportunistic repricing after investors resisted.

Six months later, 175bp is the new frontier as investors’ demand for yield is bolstered by a rising interest rate environment, which also favors floating-rate loans.

Demand is expected to rise further after a February 9 ruling by a US court exempted US Collateralized Loan Obligation (CLO) funds from Dodd-Frank rules that required managers to hold 5% of their deals.

CLOs are the biggest buyers of leveraged loans, and the ruling is expected to boost CLO issuance. Morgan Stanley and Deutsche Bank have already raised 2018 forecasts.

Repricings show no signs of letting up, despite the global volatility that hit the wider markets in 2018.

Pinnacle, which is rated Ba2/BB+, launched a repricing of a US$2.24bn term loan B due in February 2024 on March 5, along with a repayment that will cut the size of the loan to US$1.244bn.

The company, whose brands include Duncan Hines, Vlasic and Aunt Jemima, is seeking to cut 25bp from its Libor spread. Bank of America Merrill Lynch is leading the deal with Barclays.

Allison Transmission followed with a proposed repricing of a US$1.176bn term loan B due in September 2022, which is led by Citibank. The company is also asking to lower its Libor margin by 25bp and plans to make a minimum US$400m paydown on its term loan with proceeds from a senior unsecured debt offering.

MIDDLE MARKET FOLLOWS

As margins on large corporate loans shrink, middle market companies are also securing lower first-lien spreads as record sums of capital flood into direct lending and private credit strategies in search of yield.

Middle market spreads are averaging 421bp in 2018 so far, which is also the lowest level since 2007, but this spread compression is not diminishing the appeal of the asset class for lenders and investors.

“There is nowhere else to put the money,” a middle market investor said. “Managers are under pressure to remain disciplined but outside investors want you to put money to work regardless.”

Highly rated US middle market issuers are benefitting from the intensely competitive marketplace as borrowers and sponsors dictate terms, and many loans are now pricing below 400bp over Libor.

Lenders report a first quarter uptick in opportunistic middle market repricing deals, which have typically been more of a feature of the broadly syndicated loan market.

At least 20 middle market companies have priced deals below 400bp over Libor in 2018 so far. Twelve of these deals have been opportunistic repricings or refinancings. The rest have been buyout financings or add-on deals, with the exception of one dividend recapitalization.

All of the borrowers are rated, which indicates size and quality in the middle market where deals, particularly smaller transactions, are not always rated.

Middle market lenders and investors were already complaining about lower spreads a year ago and said that they could not accept deals priced at less than 400bp over Libor.

This year suspension systems provider Rough Country and medical apparel maker Strategic Partners repriced term loans to 375bp over Libor and Zest Dental priced its leveraged buyout loan at 350bp over Libor.

“Pricing is decreasing in a way that is irrational and disconnected from credit risk,” one middle market lender said. (Reporting by Leela Parker Deo Editing by Tessa Walsh)

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