| NEW YORK, July 28
NEW YORK, July 28 The U.S. leveraged loan market
is showing no signs of a seasonal slowdown. A flurry of
opportunistic leveraged loans from issuers backed by strong
demand from institutional investors suggests that the market may
have recovered from a bout of weakness earlier this year just as
geopolitical risk is increasing.
Borrowers are lining up to refinance or reprice existing
debt at lower spreads and private equity sponsors are raising
loans to fund dividend payouts to shareholders, supported by
demand from CLO buyers.
Formula One is in the market with a $3.8 billion refinancing
that will finance a $1 billion dividend to owner CVC Capital
Partners, while Springer Science + Business Media is also
raising a multi-billion cross-border loan that reprices a U.S.
dollar Term Loan B2 and replaces a euro Term Loan B1. Elsewhere,
education technology company Blackboard has also surfaced with
an $868 million repricing loan.
Investors and arrangers are pointing to unabated CLO
issuance as the main driver of institutional appetite as issuers
take advantage of a receptive market while they can even as
geopolitical problems mount.
"Certainly due to robust CLO creation alone, this is a
strong market, and there is no time like the present. Issuers
are thinking why wait - why not take advantage of a decent
market?" said Leland Hart, head of BlackRock's bank loan team.
CLO vehicles are the main institutional buyers of leveraged
loans and $7.276 billion in new CLOs have printed in July so
far. Nearly $11.9 billion of new CLOs were inked in each of the
three previous months, according to Thomson Reuters LPC data.
"There have been a lot of fresh prints in the CLO market. So
much institutional money has been raised," one banker said.
Smaller issuers are also benefiting from favorable market
conditions, another sign of the market's strength. Marine
transportation company U.S. Shipping and Zest Holdings, a
manufacturer of dental supplies, launched $213 million and $160
million term loan repricings in July.
Dutch bakery ingredients producer CSM Bakery Solutions
tapped investors for $313 million in first- and second-lien
covenant-lite incremental term loans to refinance debt and pay a
dividend to financial sponsor Rhone Capital.
Grenada-based medical school St. George's University is in
the market with a $250 million covenant-lite deal to fund a
recapitalization. Several opportunistic recapitalizations were
shelved only a couple of months ago as the market weakened and
their return shows increasing confidence.
The U.S. leveraged loan market softened in April when a rise
in interest rates was pushed out and retail investors that had
been investing in leveraged loans as a possible hedge against
interest rate rises started to pull cash out of the market to
This put the brakes on a relentless wave of refinancing and
repricings that dominated 2013 amid strong demand from
yield-starved retail and institutional investors.
New money loans increased to 69 percent of total leveraged
loan volume in the second quarter of 2014, up from 48 percent in
the first quarter. This increase comes even as overall issuance
fell 20 percent in the first half due to a drop in refinancings.
Investors' seemingly insatiable appetite for floating rate
loans after two years of non-stop inflows into bank loan mutual
funds had pushed yields to record lows earlier this year.
Leverage levels were approaching historic highs and aggressive
structures and issuer-friendly terms proliferated.
Retail investors started pulling money out in April, just as
new money activity was on the rise. The combination of more M&A
activity and the reappearance of riskier dividend
recapitalizations is now pushing yields higher.
Yields on first-lien institutional term loans were 5.55
percent in July, up from 4.94 percent in June, which is almost
on par with the 5.58 percent seen in May when yields climbed as
the retail bid exited.
Nearly 60 percent of deals are backing M&A activity and
dividend recapitalizations are priced over 5 percent. In
contrast, more than half of the refinancings are priced below 5
The loan market has been relatively resilient relative to
other asset classes so far this year. Retail investors withdrew
$412.6 million from bank loan mutual funds in the week ending
July 23, according to Lipper FMI, in line with $440.1 million
the previous week.
High yield bonds, in contrast, saw a big exodus as investors
withdrew $2.38 billion last week. "There's been some volatility
in the world, you've got high yield outflows, but as far as
loans are concerned the loan picture looks pretty solid," said a
"Maybe some issuers are getting a little nervous that the
good times are not going to last forever and they are coming to
(Editing By Jon Methven)