LONDON, April 24 (Reuters) - A $2.06 billion term loan for sales and marketing agency Acosta Inc is testing the US leveraged loan market’s ability to refinance existing loans with high leverage levels as regulators try to curb riskier lending.
The Federal Reserve, the Office of the Comptroller of the Currency (OCC) and Federal Deposit Insurance Corporation stepped up efforts to clamp down on new buyouts with higher leverage late last year, but the position on refinancing existing loans has been less clear to date.
JP Morgan is leading a refinancing for Acosta, which aims to cut the company’s borrowing cost. The loan, which was originally syndicated in August 2014 before regulators tightened the reins on Wall Street lenders, has total leverage of 7.6 times and senior leverage of 5.2 times, loan sources said.
Moody’s Investors Service puts leverage higher at more than 8.0 times.
“I didn’t think a refinancing like this could get done,” a loan investor said.
Banks have been reluctant to underwrite new buyouts with leverage of more than 6.0 times that regulators view as problematic and can fine banks if enough ‘special mention’ or criticised deals stack up on their balance sheets.
Regulators also look at repayment and can deem deals with high leverage to be passing credits if they repay half of their senior debt or all total debt in five to seven years.
The same rules were also thought to apply to refinancings, however the OCC said that deals may need more than maturity extensions or lower interest rates to make them passing credits.
“Acosta is testing the guidance,” a loan portfolio manager said.
Acosta’s original loan has yet to be reviewed by regulators, a banking source said.
The leveraged lending guidelines have hit leveraged loan volume. Institutional loan issuance dropped to $41.6 billion in the first quarter of 2015, down from $175 billion in the same period last year, according to Thomson Reuters LPC data.
Few highly leveraged refinancings have been completed since the leveraged lending guidelines were implemented and tens of billions of highly leveraged loans need to be refinanced in the next few years.
Companies that have difficulties refinancing existing leveraged loans either to extend debt maturities or reduce pricing could suffer ratings downgrades, face higher borrowing costs and could even be pushed into default.
The Loan Syndications & Trading Association (LSTA) estimates that $5.9 billion of loans that will receive special mention from regulators will mature in 2016.
This number jumps to $10.1 billion in 2017 and $14.7 billion in 2018 before topping out at $15.5 billion in 2019.
Acosta’s term loan, which matures in September 2021 is being marketed at 325 basis points (bp) over Libor with a 1 percent Libor floor and a discount of 99.75-100. The term loan will have soft call protection of 101 for one year.
The refinancing will cut the company’s borrowing costs by 75bp, which gives annual interest savings of around $15.5 million, according to Moody’s.
The company has performed well since its buyout by Carlyle Group and should be able to reduce leverage levels through operating performance, the rating agency said.
“Moody’s adjusted debt leverage is still well above 8.0 times but given our expectations for EBITDA improvement, we expect that to go down,” Manish Desai, a Moody’s analyst said.
While the leveraged lending guidelines on refinancing remain unclear, a successful syndication for Acosta will help to clarify regulators’ views on strong credits with higher leverage, investors said.
“It’s a strong credit, and at the end of the day, they are asking to make it stronger,” a CLO manager said.
JP Morgan declined to comment. (Editing by Tessa Walsh)