NEW YORK, May 23 (Reuters) - After several weeks of softness due to increased supply and fund outflows, the U.S. leveraged loan market slowed to a pre-Memorial Day crawl as issuers continued to show a strong preference for high-yield bonds.
Bankers avoided launching new loans that could be interrupted by the holiday weekend. Five loans launched this week, giving only $2.8 billion of institutional volume, compared to a weekly average of $11.2 billion this year, according to Thomson Reuters LPC data.
By Friday, the primary and secondary leveraged loan markets had largely rolled to a stop, although activity is expected to pick up again on the other side of the holiday.
“It’s going to be busy post Memorial Day. The market is just running into the holiday now,” one loan banker said.
Newly launched deals from payment processing services provider Vantiv and natural gas transportation and storage services provider Tallgrass Energy Partners made up the bulk of this week’s primary volume.
Vantiv launched $1.9 billion in loans to back its acquisition of Mercury Payment Systems and refinance debt. Tallgrass detailed price guidance on a new $1.1 billion repricing. The three other deals that launched were less than $400 million each.
High yield bonanza
In contrast, the high-yield bond market has been firing on all cylinders. Borrowers flocked to the bond market after a surprising drop in Treasury rates this year and are now catering to increased demand from high-yield investors while interest rates are set to remain low.
Seven drive-by bonds totaling $6 billion launched Tuesday as companies continue to raise new bonds before Treasury yields rise from near annual lows.
Tuesday’s bond drive-bys - which move from launch to pricing in less than a day - included a $2.35 billion dividend recapitalization for aircraft component supplier TransDigm , which followed an $825 million first-lien covenant-lite term loan D.
Despite the continued tapering of the Federal Reserve’s bond-buying program and an expected interest rate hike in 2015, the 10-year Treasury yield has fallen about 45bp in 2014.
High yield bonds traditionally yield more than leveraged loans but the gap has been closing after a sharp drop in bond yields this year as investors piled into the asset class on the expectation of a delayed rise in interest rates.
Leveraged loan yields showed a 5bp decline for the year to date at 5.15 percent Wednesday, according to JP Morgan’s leveraged loan index. The bank’s high-yield bond index has fallen 49bp to 5.28 percent this year, after the dramatic fall in Treasury rates, and high-yield bond spreads have dropped 23bp, according to Bank of America Merrill Lynch’s US High Yield Master II Index.
New deals brewing
While the pace of leveraged loan refinancing and repricings has slowed, new-money Merger and Acquisition (M&A) transactions are keeping the pipeline well stocked.
Large new M&A deals for chemical products producer Platform Specialty Products Corp (under issuer MacDermid Inc ) and branded foods company Hillshire Brands Co are awaiting syndication.
The market is also waiting for an $11 billion financing packaging backing Cerberus Capital Management LP’s acquisition of food and drug retailer Safeway Inc. The financing is awaiting regulatory approval and is unlikely to launch before late summer.
Also expected is a $4.2 billion loan and bond financing package to back investment firm Blackstone Group LP’s purchase of auto parts maker Gates Corporation.
(Additional reporting by Mariana Santibanez.)
Editing By Tessa Walsh and Michelle Sierra