NEW YORK, June 6 (LPC) - Borrowers tapping the broadly syndicated US leveraged loan market to fund their operations are peddling juicier spreads to attract investors wary of negative headline news.
Market volatility, impacted by worries about global growth and rhetoric over the US-China trade war, is giving investors the jitters as they seek to put money to work in an overheated space starved of new opportunities.
Weak terms in loan documentation, fears over deteriorating covenants and mounting corporate leverage levels are also impacting spreads, which are coming in roughly 35bp-40bp wider than a year ago.
Average yields, for example, on first-lien institutional broadly syndicated term loans rose for the fifth straight quarter to 7.61% at the end of the first quarter of 2019.
“These wider spreads are compensating for some of the risks and I feel good about where the market sits,” said David Mihalick, head of US high yield investments at Barings. “It is important to be cautious and scrutinize these deals. We are late in the cycle and are feeling macro pressures.”
The impact on yields in the large corporate space stands out when compared to middle market loans, reserved for companies generating between US$10m-US$75m in Ebitda, which typically price at a premium to broadly syndicated loans.
Yields in the broadly syndicated market have climbed so much in the last 18 months, that they were just 0.45% shy of the average yield for middle market first-lien loans at the end of the last quarter, compared to a 1.63% premium in the first quarter of 2017, according to data from LPC, a unit of Refinitiv.
“I think there is a healthy fear rationalizing the (broadly syndicated) marketplace right now,” said Tim Gramatovich, chief investment officer at Gateway Credit Partners, a division of B. Riley Financial.
Loans in market this week are already factoring in the higher spreads. A US$550m seven-year transaction for B3-rated software developer Corel Corp is expected to pay 500bp over Libor while a US$660m seven-year first-lien loan for foodservice products provider Imperial Dade is being floated to investors between 400bp-425bp, according to banking sources.
In addition to these, and several other similarly rated smaller-sized leveraged loans in market this month, two more B3-rated companies – analytics firm TIBCO Software and dialysis services company US Renal Care – are raising sizeable US$1.82bn and US$1.62bn loans, respectively.
TIBCO’s seven-year loan is expected to pay 400bp over Libor while US Renal Care’s seven-year transaction, which backs a US$2.7bn buyout of the company by a consortium of investors, is being guided between 450bp-475bp.
“After the market took a pounding in December, there seems to be a ‘fear premium,’ it isn’t massive, but it’s around,” said Gramatovich.
Loans for BB or B-rated companies were clearing at an average spread of 295bp over Libor in June 2018. A year later, the average spread has ballooned to 335bp, according to LPC data.
For example, B1-rated mobile marketing unit AppLovin in August last year snared an US$820m loan at 375bp over Libor and hospital medicine provider Sound Inpatient’s Ba3/B rated US$575m first-lien loan cleared at just 300bp in June 2018.
“A lot of the deals in the broadly syndicated loan market right now are around that US$400-US$600m mark and these are pricing based on technicals in the market,” said Barings’ Mihalick.
Amid the dearth of billion-dollar M&A-linked opportunities, however, investors are latching onto the scarce supply in the marketplace while other lender protections are expected to remain thin.
“Terms are aggressive, but repeat-issuers especially in non-cyclical industries that investors like are good to go,” an investment banker at a US bank said. (Reporting by Aaron Weinman. Editing by Michelle Sierra and Jon Methven)