NEW YORK (Reuters) - Proposals to reprice three leveraged loans have been withdrawn this week after investors objected to overly-aggressive terms as they try to protect returns amid a $100 billion wave of loan repricing and refinancing.
Investors have been pouring cash into the red-hot U.S. leveraged loan market this year, which has allowed opportunistic companies to reprice and refinance more than $100 billion of leveraged loans since January, according to LPC data.
Three deals for DuPont Performance Coatings, vitamin manufacturer NBTY Inc and industrial sand producer Fairmont Minerals, were a step too far for investors, which have seen average yields fall to 4.95 percent from 6.03 percent at the start of the year.
DuPont pulled a planned $2.3 billion refinancing on Monday after investors balked at a proposal to cut the spread on a loan which was only signed in January by 75 basis points (b.p.) which backed private equity firm Carlyle’s buyout of the company from DuPont.
The high-profile about-turn was followed by NBTY Inc’s withdrawal of a planned refinancing of a $1.5 billion, covenant-lite term loan on Monday which was designed to cut 50-75 b.p. from the spread on its existing $1.75 billion term loan.
Industrial sand producer Fairmount Minerals also withdrew a similar term loan repricing on Tuesday, citing market conditions.
The deals are the first repricing loans to be withdrawn this year, which has seen companies returning to the market in quick succession to cut the interest rates on their loans and cut borrowing costs.
“Maybe the repricings will slow down a bit,” said one loan investor. “At least I can hope,”
Other evidence of refinancing fatigue has emerged. Aggressively-priced loans including ADS Waste Holding’s repriced $1.8 billion term loan and Berry Plastics Corp’s recently-completed $1.4 billion loan have traded around or below offer prices after cutting pricing.
Secondary loan trading prices on US leveraged loans have dropped 22bp to 98.8 in the last two weeks, according to LPC data, as the number of issuers tapping the market to cut the spreads on their loans weighed on the market.
While DuPont’s pulled deal is likely to discourage aggressive opportunistic repricings, it is unlikely to effect more reasonable requests to reprice or appetite for new buyout loans as demand continues to outstrip supply.
Luxembourg-based logistics firm Dematic S.A., cosmetics manufacturer Revlon Consumer Products and casino-owner MGM Resorts announced new loan repricings on the same day that DuPont and NBTY’s loans were pulled.
Internet provider Web.com and Netherlands-based media measuring company Nielsen Co BV announced repricings the following day.
Demand for leveraged loans remains strong due to a lack of investment opportunities elsewhere. Most deals have sailed through the market, including a $2.76 billion term loan backing Virgin Media’s acquisition by Liberty Global
Last week saw a record $1.2 billion flow into US leveraged loan mutual funds, according to Lipper FMI. More than $10.5 billion of Collateralised Loan Obligation (CLO) funds, which are the major buyers of leveraged loans, have been issued in the US so far this year.
While repricing requests continue to pose dilemmas for lenders, investors’ objections to the three repricings shows that they are willing to defend returns.
“It’s healthy for the market. It shows that managers can push back here and there,” the loan investor said.
Reporting by Caleb Frazier and Natalie Wright, editing by Tessa Walsh