RLPC: Leveraged loan markets grapple with heavy September supply

NEW YORK Mon Oct 7, 2013 12:14pm EDT

NEW YORK Oct 7 (Reuters) - Leveraged loan investors are digesting a massive $37 billion in institutional loans issued in September, leading to some softness in loan pricing and backpedaling by issuers that had previously planned to come to market.

Average secondary prices have fallen about 24bp since the Federal Reserve surprised the markets and held off on tapering two weeks ago, to end at 99.3 as of October 4. The JP Morgan US leveraged loan index yield to a three-year takeout increased to 5.53 percent from 5.46 percent over the same period.

Sources said that heavy new money issuance during September, including computer maker Dell's benchmark $9.1 billion credit backing its $25 billion buyout, and hotel operator Hilton's $8.6 billion refinancing credit, has led to the recent softness.

"I think it's just a little bit of settling in and digestion of a very busy month, and luckily there's not a very big calendar right now.

The technicals are still strong," said John Cokinos, head of leveraged finance capital markets at Bank of America Merrill Lynch.

The institutional leveraged loan forward calendar has dwindled to $28.7 billion as of October 3, from $43 billion on September 12, given that the heavy M&A and LBO primary calendar post-Labor Day has mostly retreated to secondary markets.

Some new loan issuers are choosing to tiptoe out of the deal queue, rather than combat skittish markets where CLO investors and separate accounts have already used up significant cash.

Independent exploration and production company Samson Investment extended the commitment deadline on its repricing proposal on September 25, but ultimately chose to postpone its effort to reprice a $1 billion term loan to LIB+400 with a 1 percent Libor floor, from LIB+475 with a 1.25 percent floor.

Data center operator Zayo Group pulled an effort to reprice a $1.6 billion term loan B in late September. The company aimed to reprice the TLB to LIB+300 with a 1 percent Libor floor, from LIB+350 with a 1 percent floor. Investors saw that deal as aggressive, given that the company just repriced this loan last February, and prior to that, in October 2012.

Healthcare instrument concern Immucor Inc also pulled a $662 million repricing term loan B.

Debt ceiling concerns

Macro concerns, including the debt ceiling debate and the current U.S. government shutdown, are exacerbating the September supply issue, sources said.

"My phones have been very quiet," said one leveraged loan trader.

With equity declines since mid-September and markets softening broadly, sources said that these macro issues are negatively impacting new issue commitments for leveraged loans. However, these macro concerns weigh less on the leveraged loan environment than on other asset classes, just as leveraged loans and high-yield bonds had a more muted response to the Fed's September decision to hold off on tapering versus Treasury and high-grade bond markets.

"It still feels like there's technically a good environment for loans. We're not overly concerned about prices falling," said the same trader, adding that stronger credits will still be scooped up by investors.

For example, sources noted that Hilton (B1/BB-) was able to attain step-downs in pricing on a $7.6 billion refinancing TLB-2, taking advantage of prime rate funds and CLOs that are attracted to higher-rated paper. The loan finalized at LIB+300, with a 1 percent Libor floor at 99.5. Pricing includes a 25bp step-down after the completion of Hilton's IPO, and a 25bp step-down when net first-lien leverage is below 3.85 times.

Investor cash also may be replenished by billions of dollars in institutional loan paydowns related to hospital operator Tenet Healthcare's acquisition of rival Vanguard Health Systems, and Actavis Plc's acquisition of Warner Chilcott to create a global specialty pharmaceutical company.

For high yield bonds, the picture is less rosy, with investors stating concerns over a technical redemption similar to the bond outflows seen last summer stemming from rate uncertainty and U.S. government default concerns. During June, high yield bond mutual funds saw $15.6 billion in outflows.

One drive-by high yield bond issuer decided not to go forward last week, due to concerns about the market, sources added.

Sources said that supply is expected to ramp up later this month. High-end department store Neiman Marcus is launching a $3.75 billion credit on October 7 to back the company's buyout by Ares Management LLC and Canadian Pension Plan Investment Board.

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