* Toys R Us, others pull loans from market
* Loans have fueled LBOs, mergers
* Many market participants hope weakness is a blip
* Investors seem less willing to embrace "cov lite" loans
By Michelle Sierra Laffitte
NEW YORK, March 16 (IFR) - A raft of companies, including
privately held Toys R Us, have scotched plans to refinance bank
loans this week as borrowing costs have risen in the market, in
an early sign that capital markets may be weakening.
A massive earthquake in Japan threatens the global economy
and has made investors less willing to take credit risk,
particularly in loans made to riskier companies, known as
The recent deal cancellations could just be a hiccup, but
if the loan market continues to weaken, the pace of merger
deals and leveraged buyouts may slow, experts said.
"People have been reminded of the uncertainty and
of how fragile things can be," a portfolio manager said.
Toy seller Toys R Us tried to refinance a $1.1 billion bank
loan, but decided not to on Monday, because it would be too
expensive. On Wednesday privately held Asurion, which provides
insurance against wireless devices being lost or stolen, pulled
a $4.5 billion loan citing market conditions.
Bank loan investors largely shrugged off earlier signs of
potential trouble in the global economy, including the rising
oil prices that followed Middle East tumult. But the
earthquake, combined with previous difficulties, has changed
the market, investors said.
"Issuers have recently pulled back aggressive deals,
waiting on the sidelines as Japan adds to growing macro
concerns," said Gautam Kakodkar, credit strategist at Barclays
Other companies, including Swift Transportation, (SWFT.N) ,
MedAssets Inc (MDAS.O) , payments processor Fifth Third
Processing, and food industry marketer Advantage Sales and
Marketing have similarly withdrawn deals in the last week.
The loan market is enormous, with U.S. banks having more
than $1.2 trillion of loans to companies outstanding. But many
of those loans do not trade actively, and are not syndicated.
The volume of syndicated bank loans was about $59 billion in
the 12 months ended March 2011, according to Thomson Reuters
LPC data, about $29 billion of which were leveraged loans.
Many in the market view the loans being pulled as little
more than a blip. The loan market had grown increasingly
tolerant of features of loans, such as so-called "covenant
lite" terms, that give borrowers more rights at the expense of
lenders, but that seems to be shifting.
"If (a borrower) is not under pressure to close this week,
why not wait two weeks and see if you have a better shot of
getting covenant light or whatever it is," said Brett
Barragate, co-head of the banking and finance practice at law
firm Jones Day in New York.
With central banks globally having boosted the money
supply, investors have ample funds to put to work, and loans
have been seen as an attractive place to invest.
Most loans are floating rate, meaning they can perform well
if inflation rises and interest rates start rising. And loans
are usually secured by assets, unlike corporate bonds, making
them attractive to risk-averse investors seeking yield, even if
the borrowers do not have investment-grade credit ratings.
Loans have helped fuel leveraged buyouts and big merger
deals. Thanks in part to the loan markets, leveraged buyout
executives say that $10 billion to $15 billion buyouts are
possible again, after having been inconceivable just 18 months
Toys R Us decided that its cost savings from refinancing a
bank loan would be insufficient at current prices.
Given the negative sentiment in the market and the fact
that the deal was not imminently necessary, the company decided
to wait until market conditions improve to re-launch the deal,
Soon after Toys R Us withdrew its deal, healthcare data
processing company MedAssets pulled a $635 million term loan
targeted to institutional investors. Payments processor Fifth
Third Processing withdrew a $1.775 billion refinancing as well.
Last week, trucking company Swift Transportation scotched a
$1.07 billion loan, and Advantage Sales & Marketing withdrew a
$1.225 billion deal, amid lenders' pushback.
Loan trading in the secondary market has also weakened,
which lifts the rates that companies have to pay on new loans.
Many participants hope that the weakening of the loan
market is temporary, because defaults are still low and loan
funds continue to receive funds from investors.
However, the amount of negative news keeps accumulating and
it is unclear whether it could lead to a more pronounced
downturn, investors said.
(Reporting by Michelle Sierra Laffitte, Additional
reporting by Caroline Humer, editing by Dan Wilchins and Andrew