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NEW YORK, June 22, 2018 (LPC) - US companies including cell phone insurance provider Asurion and production studio Metro-Goldwyn-Mayer (MGM) are raising second-lien loans rather than cheaper high-yield bonds to take advantage of the flexibility that yield-hungry investors continue to offer.
Asurion is raising a US$1.5bn second-lien loan to finance a recapitalization that will return money to shareholders. The deal is the largest second-lien offering of 2018 so far, following a US$665m deal in June for software company Vertafore, which also backed a recapitalization.
Although both instruments offer similar covenant-lite terms, second-lien loans allow private equity firms to repay at will, unlike bonds which offer investors call protection. Second-lien loans are, however, more expensive as they have a second claim over assets in the event of a bankruptcy.
“Because credit agreements have looser protections and seem more bond-like, even large deals may go to the loan market,” said Christina Padgett, a senior vice president at Moody’s Investors Service.
Investor demand for floating-rate loans is being boosted by US interest rate rises. Seven rate increases by the Federal Reserve since December 2015 has raised the federal funds rate to 2% from 0.25%, and are boosting lending rates tied to Libor.
Leveraged loans are priced with a spread over Libor and are yielding 9.7% on average, according to Thomson Reuters LPC data. High-yield bonds are currently yielding 6.4% on average.
Asurion’s second-lien loan, along with a US$2.25bn first lien loan, will allow the company to return capital to its owners. Guidance on the second-lien loan opened at 675bp over Libor while the first-lien loan is expected to price at 300bp over Libor.
Asurion lined up its existing US$1.8bn second-lien term loan in July 2017, after strong demand for the deal allowed it to price at 600bp over Libor after circulating guidance at 600bp-625bp.
The company is transitioning from a private equity-owned company to long-term investors such as sovereign wealth funds and pension funds, according to S&P. Asurion has moved from majority private equity ownership to a 30% stake, according to Moody’s, and the prospect of less dividends could make the company’s debt more attractive to investors.
“The challenge with Asurion has always been the staggering in frequency and size of dividends the sponsors have extracted over the years,” said Michael Terwilliger, a global portfolio manager at Resource America. “Longer-term holders may be less myopically dividend focused, which could allow the credit to delever.”
Asurion’s leverage was 3.8 times at the end of March, compared to 6.5 times at the end of 2014, according to S&P. The ratings agency said it expects leverage to jump to 5.9 times with the new debt, but foresees it falling to around 5.5 times by 2019. MGM GOES LOW
MGM is also currently shopping a US$500m second-lien term loan alongside a US$400m first-lien term loan, which is notable due to its low second-lien pricing of 450bp over Libor. Five second-lien loans of at least US$400m have priced so far this year, according to Thomson Reuters LPC data.
This is only the second time this year that a second-lien loan is expected to price below 500bp, the data shows. The average spread on a second-lien loan during the first quarter of 2018 was 754.7bp. In 2017, only three second-lien loans priced below 500bp over Libor.
The second-lien loan has a high rating for junior debt at B2/B- Most second-lien loans are rated B3/B- or lower.
“You don’t see a second-lien loan price like that very often even if it is more highly rated than usual,” a leveraged finance lawyer said.
Manufacturer Goodyear Tire & Rubber Co priced a US$400m second-lien loan at only 200bp over Libor in March to refinance an existing second-lien loan. That loan was rated Baa3/BBB-. The company has included second-lien loans in its capital structure since at least 2005 when the debt was priced at 275bp over Libor.
A strong second-lien market is expected to continue throughout the rest of the year as investors continue to look for yield amid a bullish US economy. Demand for higher yielding second-lien loans is exceeding first-lien debt, in some cases.
Hospice provider Kindred at Home tightened pricing during syndication on a US$475m second-lien term loan to 700bp over Libor after guiding the loan in the 725bp-750bp range, while increasing pricing on a US$1.35bn first-lien term loan to 375bp over Libor from guidance in the 325bp-350bp range.
Second-lien demand is expected to be propelled further by investors in Collateralized Loan Obligation (CLO) funds, which are the largest buyers of leveraged loans. CLOs are adding second-lien investment baskets in an effort to generate higher yields, a senior banker said.
“The market has shifted more toward higher risk and higher return in the context of a healthy economy and earnings and companies doing well and low unemployment, and I think that’s going to continue,” the banker said.
Asurion did not return request for comment.
(Additional reporting by Kristen Haunss and Lynn Adler.)