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 said.
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 bubble concerns.
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 continue unabated."
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 added.
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 disciplined.
"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 investor.
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 in Boston.
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 DeSimone.
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 credit facility.
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 said.
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 comment.
"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.