January 11, 2019 / 3:47 PM / 9 days ago

Rising secondary prices aid US loan market

NEW YORK, Jan 11 (LPC) - The US leveraged loan market breathed a sigh of relief this week as rising secondary prices erased most of December’s heavy losses, but arranging banks are still facing an uphill task to syndicate deals underwritten last year, some of which have already been funded.

LPC’s index of heavily traded loans was at 96.82 on Thursday, up 225bp from a multi-year low of 94.57 on December 28. The index was trading as high as 98.81 in early October before succumbing to equity volatility before year end.

Low secondary prices, coupled with more than US$12bn of outflows from retail loan funds in December including a weekly record of US$3.5bn in the last full week of the year, put the fear into bankers who headed into the holiday break wondering how they would sell deals underwritten in 2018.

These deals included a US$10.2bn financing backing Brookfield Business Partners’ buyout of Johnson Controls’ power solutions unit, which makes advanced batteries for vehicles.

While higher secondary prices may bring relief for smaller deals, the size of the Johnson Controls transaction continues to worry bankers as it will require widespread market support.

“I think the market right now as we speak can do a normal deal that’s appropriately priced,” a banker said. “The problem is building a very large book, and Johnson Controls is enormous. To build a book that size you need a market that’s firm, as well as confidence, or the big guys just won’t do it. You need people willing to buy US$250m.”

Barclays, Credit Suisse, JP Morgan, Bank of America Merrill Lynch, BMO, CIBC, Citigroup, Deutsche Bank, Goldman Sachs, HSBC, Royal Bank of Canada, Scotiabank and TD Securities have underwritten financing for the acquisition.

Johnson Controls’ acquisition is expected to close by the end of June, which gives banks a little room to breathe and the market some time to recover, although the deal will be hanging over the market in the interim.

BIGGER NOT BETTER

Bankers have also been working to sell deals that were postponed in late 2018 amid volatile market conditions, and are offering deep discounts which could wipe out fees or lead to losses for lenders.

Some of the deals were funded to take the debt off banks’ books, the largest of which was a US$1.275bn loan package backing information technology services provider ConvergeOne’s buyout by private equity firm CVC Partners.

Banks provided CVC with the loans in the first week of January when the buyout closed, without syndicating the deal. The first-lien loan was increased to US$960m from US$925m and priced at 500bp over Libor versus guidance of 450bp over Libor. The second-lien loan was cut to US$325m from US$350m and priced at 850bp over Libor, at the wide end of guidance in the 825bp-850bp over Libor range.

The deal is expected to return to the market for syndication in mid-to-late January, sources said, with a deep first-lien discount of around 96 and around 93-94 on the second-lien loan.

CVC has worked with banks to get the deal done by putting in more equity and reducing leverage, the sources said. Deutsche Bank is leading the first-lien and UBS is leading the second-lien.

Banks are also currently working on selling a US$400m term loan for battery maker C&D Technologies, which is financing the purchase of Trojan Battery Co. Commitments were originally due on December 13, but banks postponed the transaction over the holiday period.

The deal originally came to market with guidance of 500bp over Libor and a discount in the 99-99.5 range and is now being offered with a very deep discount in the high 80s, a second banker said. Discounts at this level typically imply losses. Bank of America Merrill Lynch is leading this transaction.

COMPETITIVE TENSION

Not all of the deals that were stuck in the market in December are expected to return as private debt funds are moving in to take up some of the slack, a third banker said.

“There are a lot of discussions happening behind the scenes,” the third banker said. “In a lot of these deals, the private capital community made inbound calls to banks with ideas, and some were willing to work over the holidays. Now the regular loan investors are looking at buying again with the market bounce and hearing private capital is involved. It’s created a bit of competitive tension.”

A US$500m term loan supporting private equity firm First Reserve’s acquisition of a 50% stake in energy company Blue Racer Midstream LLC is now expected to be sold in a private transaction without being syndicated, the third banker said.

Commitments were due on December 11. Guidance circulated in the 575bp-600bp over Libor range with a discount of 99 Goldman Sachs is leading the deal.

Banks also postponed and funded a US$415m term loan backing Blackstone’s buyout of drill bit maker Ulterra Drilling Technologies. The loan launched October 30 with guidance in the 475bp-500bp over Libor range and a discount of 99.5. Wells Fargo is leading the deal.

Although deals are being sold at steep discounts, held by private banks or sold to private debt funds prepared to drive a hard bargain, the outlook for leveraged loans is improving after a nerve-wracking December, bankers said.

“I don’t think we’re in a disastrous shape, especially from an underwriting perspective,” a fourth banker said. “There have been a few new commitments written over the last few weeks, so people aren’t out of business. But they are very focused. It was a hard sell-off.”

Deutsche Bank, UBS, Bank of America Merrill Lynch, Goldman Sachs and Wells Fargo declined to comment. (Reporting by Jonathan Schwarzberg Editing by Tessa Walsh and Jon Methven)

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