NEW YORK, Feb 15 (LPC) - A spike in borrowing costs has all but dried up the US market for refinancing leveraged loans, with the exceptions of companies including Getty Images with a pressing need to replace maturing debt or higher-rated corporations such as Altice that can more readily set favorable terms.
Through the first month of the year, refinancing volume from leveraged issuers totaled US$24.3bn, which is just 37.3% of the US$65.2bn of refinancing activity seen last year during the first month, according to LPC data.
As the Federal Reserve indicated interest rates are not expected to continue to climb at the same pace, retail investors hoping to benefit from the floating nature of leveraged loans in a rising interest rate environment have pulled money out of loan funds for thirteen straight weeks. Slow formation among collateralized loan obligations, the biggest buyers of loans, has further dampened demand.
LPC’s index of heavily traded loans stood at 96.97 on Thursday after sinking to a multi-year low of 94.57 on December 28. The index was trading at 98.91 on October 8.
First-lien loan yields hit 6.82% in the fourth quarter of 2018 versus just 5.58% during the fourth quarter of 2017, according to LPC data.
“Until the secondary market is trading back around par, M&A is going to make up the bulk of activity,” said a leveraged finance banker. “Refinancings are going to be pretty rare and repricings are off the table.”
Most loan issuers do not have an immediate need to refinance their debt after strong demand for the asset class allowed most companies to push out maturities over the last few years. Issuers have US$185bn of loans coming due in 2022 and US$256bn in 2023 versus just US$11bn in 2019 and US$45bn in 2020, according to Moody’s Investors Service.
“Companies that have short-dated paper today either have a small tranche of a large capital structure due and have market access or a potentially broken capital structure that hasn’t been able to be refinanced,” said Andrew Carlino, a Bain Capital credit managing director. “The companies in the middle have generally kicked out their maturities already.”
As an example of a company with near-term need to go to the market, Getty Images just wrapped up a US$1.55bn-equivalent loan refinancing after receiving a US$600m investment from Koch Equity Development.
The company has posted better financial numbers than it had last year when its capital structure was viewed as “unrefinanceable,” according to one investor.
The changes helped generate enough demand that the company was able to increase the size of the loan by about US$100m after cutting a proposed secured bond by the same amount to US$300m. The deal ended up including a US$1.04bn dollar-denominated loan and a €450m loan.
The dollars priced at 450bp over Libor after guidance circulated in the 450bp-475bp over Libor range while the euros priced at 500bp over Euribor versus guidance in the 500bp-525bp over Euribor range.
The company announced in September that it was in the process of refinancing its debt after the Getty family agreed to buy back a majority stake in the company from private equity firm The Carlyle Group.
Getty arranged a US$1.895bn term loan in May 2013 that was due in May 2019 and originally priced at 575bp over Libor. The company last year was touting plans to investors to cut its leverage to 6.0 times from 9.0 times, as reported by IFR.
On the other end of the credit spectrum where companies are refinancing with large capital structures, cable and telecommunications company Altice just arranged a US$1bn term loan that will refinance a portion of its 10.125% notes due in 2023.
The company had US$14.8bn of outstanding debt as of September 30, 2018, according to its most recent quarterly report.
Investors this year have shown a strong preference for known issuers and allowed the company to tighten pricing during syndication to 300bp over Libor from 325bp over Libor.
Other companies with easy access to the capital markets are looking to the pro rata market as they look to refinance. Commitments are due March 1 on a US$4.1bn term loan A from computer giant Dell Technologies that will be used to refinance an existing term loan A of the same size.
Carlino said that that repricing opportunities will likely be few and far between this year based on where secondary levels are trading and the supply-demand dynamic. However, some of the recent LBOs that priced well above where deals were last year could potentially be repricing candidates if the macroeconomic conditions hold up and the companies hit their financial expectations.
Getty Images declined comment. Altice did not return request for comment. (Reporting by Jonathan Schwarzberg Editing by Michelle Sierra and Lynn Adler)