| NEW YORK, March 14
NEW YORK, March 14 Two deals were pulled from
the U.S. leveraged loan market since late February, but this
fringe resistance is doing little to change issuer-friendly
dynamics that still allow opportunistic companies to push
through aggressive financings, investors and arranging banks
Demand still far exceeds the limited supply of new loans,
preserving the technical status quo, even though it has
moderated from a year amid regulatory uncertainties and asset
Investors are more willing to push back on deals, including
the $1.95 billion repricing for diversified industrial company
Rexnord and the $370 million proposed repricing for Aspen
Dental, when terms appear overly borrower-friendly.
Rexnord's deal was pulled this week and Aspen Dental's was
yanked in late February.
"These pulled deals are the minority, and there's still
overwhelming demand," said Grier Eliasek, president and chief
operating officer of Prospect Capital Corp. "It's been a
borrowers' market for quite some time, and I'm not sure that's
going to change for the foreseeable future because the drivers
The high level of interest in loans is due to their role as
a possible hedge against rising interest rates and an ongoing
benign default environment in the leveraged loan space, Eliasek
Retail money continues to pour into mutual funds, which have
racked up 91 straight weeks of inflows, and the creation of
Collateralised Loan Obligation funds has accelerated on optimism
that regulatory constraints are being addressed.
Still, both retail and institutional investment is slower
than a year ago, allowing buyers to be more discriminating and
"Investors are pretty fully invested, flows are relatively
modest at the moment, and that allows the market to hold the
line on credit and pricing where deemed necessary," said one
Some deals that might have pushed the envelope are being
tweaked to sweeten terms and ensure that they do not fail.
Investors are worried about duration risk, even if the
Federal Reserve's first official rate hike is unlikely before
2015. That outlook is keeping investors oriented towards
floating-rate leveraged loans and borrowers alert for repricing
opportunities while rates remain relatively low, sources said.
"There's still healthy demand for bank loans and credit, and
there's not a massive amount of net new supply into the market,"
noted Jonathan DeSimone, a managing director at Sankaty Advisors
The current refinancing cycle is still in gear, but closer
to an end than the beginning, and B-rated deals are seeing
pushback from investors at yield spreads of around 275 basis
points over Libor, he said.
There's a floor, based on relative value and the ability to
redeploy assets at an attractive return, and some of the deals
that have been pulled found that indifference point," said
Knocking on the floor
Both of the pulled deals were repricings.
Rexnord's $1.95 billion loan was withdrawn after changes
that included increasing the yield spread on the par-priced loan
to 300 basis points over Libor from 275 basis points over Libor,
and doubling soft call protection to one year failed to lure
enough demand. The Libor floor stayed at 75 basis points.
Rexnord was able to refinance $1.95 billion at the same 300
basis-point spread only last August, with a 1 percent floor and
an original issue discount of 99.
Aspen Dental's $370 million loan tried to cut pricing to 475
basis points over Libor with a 1 percent Libor floor from 550
basis points over Libor and a 1.5 percent floor on it existing
This opportunistic deal concerned some investors, because
the company was planning to use a covenant-lite structure on the
heels of weaker-than-expected 2012 financial results, sources
A maintenance covenant was added to the term loan, and a
spread increase was discussed, but the company is likely to
obtain more favorable terms after an additional period of
sustained improved performance, investors said.
Leonard Green & Partners, which acquired Aspen Dental in a
2010 leveraged buyout, did not immediately return a call for
"It's still an issuers' market," the first investor said,
"but it looks like we're finding the limits to pricing and
structure in some of these loans."
Some high-quality issuers, including Dunkin' Brands, Aramark
Corp, PVH Corp and Microsemi Corp, are refinancing into new
loans with lower coupons and testing market acceptance of
pricing of 250 basis points over Libor with a 75 basis-point
floor, he said. "These low spread levels appear to be getting
done, but barely, and often trade at or slightly below par
afterwards, suggesting a bottom."
Other newer loans, including WME IMG, are lower rated and
offer higher spreads, are aggressive from a leverage and loan
structure standpoint and struggling to get done without revising
terms, the investor added.