November 29, 2018 / 9:48 PM / 10 days ago

U.S. loans struggle to clear volatile primary market

NEW YORK (LPC) - Some US leveraged loans are struggling to clear the market after volatility in global equities pulled secondary loan prices lower and prompted a correction that has stranded opportunistic deals in the primary market as sentiment turned.  

Underwritten loans for companies including distributor Dealer Tire and private jet firm XO Management are floundering in the primary market after the secondary slump, raising the prospect of ‘hung’ deals and possible losses for arranging banks before the end of an increasingly turbulent year.

At least five deals have been pulled in the US since mid-November, when the loan market finally started to react to the volatility that has rocked the global equity and bond markets since early October. Mounting geopolitical risks and a weak oil price have injected unwelcome uncertainty and are taking a toll on confidence.  

“The market is ugly,” an investor said.

“I think people are spooked right now,” said a head of leveraged finance.

A proposal to amend and extend US$383m of loans for manufacturing conglomerate Jason Inc was postponed on Tuesday amid choppy market conditions. Chemicals company Perimeter Solutions has withdrawn a US$542m repricing deal, and Ta Chen International, a US-based subsidiary of aluminum and steel distributor Ta Chen Stainless Pipe Co, also pulled a US$250m loan backing an acquisition.

Communications technology provider Sorenson also postponed a US$950m refinancing loan that had commitments due November 28.

Algoma Steel led the recent run on November 19 when it canceled a proposed US$300m exit financing loan that was replaced with a backstop and an asset-based facility.

Volatility is allowing investors to push back hard against opportunistic and aggressive deals that are already in the market, which has effectively closed the market to these deals in the near future. Issuers will have to cancel or postpone plans or accept far wider pricing and investor-friendly terms to get deals done, industry sources said.

The weakening trading profiles of big multi-billion dollar benchmark loans that were completed in September, including the buyout of Refinitiv, formerly Thomson Reuters Financial & Risk unit, the specialty chemicals unit of AkzoNobel and hospital group Envision Healthcare are also casting a shadow over the market. Envision Healthcare has fared the worst with the average bid for its term loan at 95.79, according to LPC data.

ROUGH RIDE  

Increasing volatility and investor selectivity and sensitivity to any potential credit issues is also making it harder for companies with any kind of story that would require extra scrutiny from investors to get done. The acquisitions of Dealer Tire and XO Management fall into this category.

“The market figures that if someone’s coming to the market now they must really need us. So I think some investors are saying let’s bid low and see how that plays out,” the head of leveraged finance said.

Dealer Tire is looking to line up a US$975m term loan to back its buyout by private equity firm Bain Capital. Price guidance was circulated in the 425bp-450bp over Libor range. Commitments were due November 16, but the deal has yet to close. The company reported weak earnings during the syndication period, which created problems amid turbulent market conditions, a second investor said.

XO Management is seeking a US$280m term loan to back its purchase by Swiss billionaire Thomas Flohr’s Vista Global Holding. Commitments were due on October 30 and arranging banks are still trying to sell the deal. The business is considered highly cyclical, according to Moody’s Investors Service, which rated the company B2. Although leverage is not excessive at around 5.2 times, the company’s US-based geographic concentration increases risks in an extremely fragmented market.

JP Morgan is leading both deals and is working to find clearing levels for the transactions before the end of the year, a portfolio manager said, as investors remain nervous about deteriorating earnings. JP Morgan declined to comment.

“There’s a lot of fear of the economy running out of gas. There’s not a lot of evidence of that, but investors are definitely being cautious - particularly with cyclical names. That risk-off mentality is causing some deals to fail outright,” the leveraged finance head said.

Loan funds saw a US$1.32bn outflow this week, following a US$1.74bn outflow last week, which was the largest since December 2015, but the issuance of Collateralized Loan Obligation (CLO) funds remains strong as separately managed accounts seek floating rate assets that offer yield and protection against rising interest rates.

Despite recent weakness in the loan market, bankers and investors expect conditions to improve in 2019, and some are even seeing this period as a buying opportunity, investors said.  

“It is certainly a credit pickers market,” said Neil Desai, a managing director and portfolio manager at investment firm Highland Capital Management. “You can find high-quality loans that are below par simply due to the fact that their coupons have gotten so low.”

Earlier this year, 60% of loans were trading over par, Desai said, but only 9.2% of loans were trading north of par on November 27, which is the lowest level since July 2016, according to LPC data.  

“That encourages people to start picking up their pencils and do some work,” Desai said.

Reporting by Jonathan Schwarzberg; Editing by Tessa Walsh and Michelle Sierra

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