Berry Global seeks lower rates as investors fly to quality

NEW YORK, Oct 9 (LPC) - Plastics maker Berry Global is looking to take advantage of white-hot demand for better-rated leveraged loans and reduce pricing on approximately US$2.03bn in debt as global volatility rippling through the market is causing investors to seek safety in higher-quality assets.

Berry, rated Ba3 by Moody’s Investors Service and BB+ by S&P Global Ratings, or one notch below investment grade, is aiming to tighten the margin on a US$1.545bn facility maturing in 2022 and a US$487.5m transaction due in 2024 by 25bp to 200bp over Libor.

The flight to quality comes as lenders grow cautious of a cooling economy in the US and slowdown in global growth. Institutional investors have also received billions of dollars in loan repayments from double-B rated borrowers since August, including resort developer Las Vegas Sands and payment processor First Data, and are keen to redeploy this capital into similarly-rated debt.

The loans, which are being offered at par, come amid a dearth of opportunities to invest in the debt of double-B rated companies, and investors are chomping at the bit to pick up what little there is in near investment grade territory.

“Investors are sharpening their pencils,” said Frank Ossino, senior managing director at Newfleet Asset Management. “There is a big bid for higher quality, BB risk when there is less of it around.”


Berry has mandated Goldman Sachs to lead its repricing and given lenders until October 11 to commit to the transaction. At the same time, high demand for quality paper has outstripped supply, and double-B spreads are tightening.

Double-B rated leveraged loans were launched at an average spread of roughly 231bp over Libor throughout September, 2bp tighter than deals launched in September 2018, according to data from Refinitiv LPC.

Single-B borrowers, however, are paying far more for their debt, with loans launching at an average price of 446bp last month, compared to roughly 380bp throughout September 2018.

“There is strong demand for them (Berry) and other BB names that may even get loans done at 175bp (over Libor),” said one investor.

Berry Global declined to comment and spokespersons for Goldman Sachs were not immediately available for comment.

Theme park operator Six Flags, rated BB by S&P, repriced a US$798m term loan, through Wells Fargo Securities, to 175bp over Libor on October 4 from 200bp. And Ba2-rated Allison Transmission, which designs hybrid-propulsion systems for vehicles, on Tuesday tightened its US$646m loan by 25bp to 175bp over Libor. Citigroup arranged the transaction.

While Berry and its double-B rated peers enjoy a reduction in costs, single-B borrowers face greater scrutiny from collateralized loan obligation (CLO) managers that are under pressure to make fewer allocations to single-B names in their portfolios.

In return, several loans have had to offer more investor-friendly terms in exchange for CLO commitments. CLOs made up some 55%-60% of allocations in leveraged loans at the end of September, according to LPC Collateral.

For example, DuBois Chemicals on October 4 reduced a first- and second-lien loan by a combined US$65m and its sponsor Altas Partners is making an extra equity injection, sources said.

Lead bank JP Morgan also sweetened the margin on Dubois’ US$520m (reduced from US$540m) first-lien loan to 450bp over Libor from a range of 400bp-425bp and steepened the discount to 97.5 cents on the dollar from 99.5 cents. The debt backs the company’s purchase by Altas.

DuBois is hamstrung by its narrow scale and adjusted high debt to Ebitda ratio, which is between 7.0-8.0 times, S&P said in a September 17 report. The company also “lacks meaningful scale,” leaving it susceptible to weak demand and pricing shocks, the ratings agency said.

The chemicals company is the latest borrower that has adjusted a deal due to its exposure to economic cyclicality.

Auction house Sotheby’s, digital imaging company Shutterfly and automotive artificial intelligence firm Cerence all rejigged their single-B rated loans in September, offering lenders greater spreads and tighter documentation to protect investors if the companies struggle to repay their debt.

“The demand for higher-rated credits is partly driven by investor sentiment on the credit cycle, but also the embedded risk management in the structure of CLOs,” added Newfleet’s Ossino.

Credit quality tests and various risk baskets appear to be governing the challenges surrounding recent lower quality loans, according to Ossino.

“The structure of the CLO drives appetite for risk. This creates a healthy dynamic in that the CLO structure is currently pricing risk according to the amount of incremental risk it can take,” said Ossino. (Reporting by Aaron Weinman. Editing by Michelle Sierra and Leela Parker Deo.)