NEW YORK (Reuters) - New jumbo leveraged loans for healthcare giant HCA Inc and chipmaker ON Semiconductor are expected to price at a premium, as a dent in demand and heightened volatility in the macroeconomic environment have made riskier loans more difficult to sell.
Large loans, historically, have been considered more attractive as they are easier to sell without materially impacting price. But a dearth of new Collateralized Loan Obligations (CLO) investors, the largest buyers of loans, and 31 consecutive weeks of loan fund outflows have dried up demand for leveraged loans, which are costly and more likely to default.
“Counter intuitively, bigger deals are harder to get done these days given risk-off environment and weak technicals,” said Sean Coleman, chief credit officer of Franklin Square.
The shift marks a stark contrast from recent years when buyers felt compelled to step up and purchase the biggest loans, which were considered to be the most liquid. Loan investors also wanted to own the debt that would make up the loan index to make sure that they were keeping up with the benchmarks.
So far just six loans of at least US$1bn have priced in 2016 after 67 term loans of this size priced in 2015, according to Thomson Reuters LPC data. The current sweet spot for deals is in the US$700m-US$800m range, according to one investor, with deals over US$1bn definitely causing a bit of strain.
BIGGER ISN’T BETTER
HCA came to the market with a US$2bn term loan to refinance an existing loan but quickly cut the size to US$1.5bn after it was able to increase a high-yield notes offering to US$1.5bn from US$1bn.
ON Semiconductor launched a US$2bn term loan Thursday to back its acquisition of Fairchild Semiconductor.
“Two billion dollars is pretty hefty,” the investor said. “This will definitely test the market in terms of size, and you are going to see them pay a little extra premium for that size.”
The market for big deals has not dried up completely, and investors are still willing to buy names that they are familiar with. HCA is expected to find an easier time on the market because it is a well-established name and has a strong following, the investor said.
In addition to concerns from investors, issuers are dealing with banks that are reticent to agree to underwrite deals after they were unable to syndicate several deals late last year and into this year.
One of those included a US$5.6bn loan and bond deal backing the buyout of software provider Veritas, which was shelved in November. Banks still have that debt on their books.
“With the current volatility in the market and the bad experiences that some underwriters have had with deals, I think quite a few of the banks have taken a significant hit and are not really forthcoming right now with underwriting,” said Stefanie Birkmann, a finance partner at Ropes & Gray.
That said, the outlook for 2016 is not completely gloomy, and secondary prices rose in the early half of the week, offering a glimmer of hope.
“I’m not so pessimistic for the year as a whole. I think it will take some time to work this through, but I think we are seeing a pickup already in medium-size deal activity,” Birkmann said.
This would be music to the ears of both banks and issuers with plans to come to market, and the leveraged loan world is already waiting for the institutional portion of the financing package backing technology giant Dell’s acquisition of data storage products provider EMC.
Banks are still working on selling the US$10bn pro rata portion of the expected US$45bn financing package. Dell has said it plans to arrange a US$8bn Term Loan B and US$25bn of notes to finance the deal. This loan is expected to hit the market toward the end of the second quarter.
(Additional reporting by Lynn Adler.)
Editing By Michelle Sierra and Chris Mangham
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