RLPC: New money deals lead healthy loan pipeline

NEW YORK Fri Dec 7, 2012 9:22am EST

NEW YORK Dec 7 (Reuters) - The leveraged loan pipeline through year-end is rife with new-money deals, providing some good news for asset-starved investors. The institutional pipeline stands at $36 billion as of December 6, with about $17.8 billion, or about 50 percent of total deals, representing leveraged buyout (LBO) or M&A transactions.

From October through the end of November, approximately $55 billion of institutional new-money deals were completed or in market. This is about double the $28 billion of new-money deals in the full third quarter.

A low-rate environment for growth-enhancing transactions, today's strong demand from loan investors, and a push of deals that need to close before year-end are all driving a barrage of M&A and LBO deals in the pipeline.

Only about 25 percent of deals in the institutional calendar are pure refinancings/repricing transactions. By contrast, refinancing comprised 47 percent of institutional volume in 3Q12, 59 percent in 2Q12, and 63 percent in 1Q12.

"For traditional refinancing, a lot of deals have already taken place," said one buyside investor. "That's why you're seeing the 2014 maturities erode."

In the place of refinancing, M&A, LBO and dividend recap deals are the major contributors to expected issuance through year-end.

"We're expecting heavy volumes the first two weeks of December," said a buyside investor.

PVH Corp is marketing a $1.875 billion term loan B to back the acquisition of Warnaco. On December 6, USI Insurance Services launched a $1.025 billion covenant-lite term loan B to back Onex Corp's buyout of USI.

With issuance flowing to the market in droves, investors can afford to be choosier. While demand technicals remain strong, hefty supply allows investors to lean toward higher-quality deals, and to require higher compensation and stricter terms for weaker credits.

"We've seen this the past couple Decembers," said one buyside investor. "Issuers have been concerned every year for the past few years about changes in tax rates. As a result, the supply calendar gets crowded. Terms and conditions tend to get a little bit better for investors in December, versus the October or November timeframe."

The week of December 3, ContourGlobal pulled a $350 million first-lien term loan. Patheon sweetened terms on its $565 million term loan B by increasing the spread, decreasing the loan's accordion feature and removing the sunset provision on the loan's MFN protection. And RedPrairie raised pricing on its new $2.2 billion covenant-lite acquisition loan.

No rest for the weary

Some 2013 new-money launches are already on deck. DigitalGlobe is prepping for a $1.2 billion credit to back the company's acquisition of Geoeye. That will likely launch next year, sources said. Financing for GenCorp's $550 million acquisition of Pratt & Whitney Rocketdyne may also spill into next year.

"Deals related to transactions that aren't going to close to March, April, or May will not want to come to market now," said one investment strategist. "If you get commitments today you have to pay a ticking fee." Along with the new deals, investors will contend with macroeconomic issues and 4Q12 earnings results next year.

"Key issues include the resolution of the fiscal cliff, which is positive if resolved, and whether interest rates remain low, which is positive if they do," said one credit analyst.

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