LONDON Jan 13 Lenders to European leveraged
loans are seeing their allocations scaled back to such an extent
that investors have been forced to inflate orders in a bid to
attempt to secure decent ticket sizes.
Scale-backs in the market during the last quarter of 2016
were at their highest level since the financial crisis, as a
deluge of money from a raft of new CLOs and managed accounts
flooded into the few new-money deals that were available.
"Scale-backs are brutal at the moment," a leveraged finance
For example, a 125m add-on for Belgium-based Continental
Foods in December resulted in a 1bn order book.
The trend is set to continue into 2017 while the technical
dynamic of high demand and low supply dominates.
"Until there is a massive pick-up in M&A there is going to
be a demand and supply imbalance. People are disciplined around
the edges but it is hard to be on every situation," a second
leveraged finance banker said.
A 50m add-on for French call centre operator Webhelp has
seen some significant orders and the books are already full,
despite commitments not being due until January 17, a source
close to the deal said.
Add-ons have proved very popular for investors already
familiar with a credit. Of late, many investors have been
putting in ticket sizes for a large proportion of a tranche, if
not the whole tranche.
"People have shown healthy appetite for deals out there and
in some cases given orders that are unrealistic in the context
of certain deals, even if they are happy to be hit with the full
allocation," a third leveraged finance banker said.
Some funds are inflating orders beyond approval levels, in order
to try to minimise the effect of scale-backs. In one case, an
investor put in a ticket size of around 150m when it wanted
50m of paper, a source said.
Investors are also relaying to arrangers what allocations
they want and leaving it to the discretion of the banks to write
down the ticket sizes needed to ensure they get the desired
amount after a scale-back, an investor said.
Smaller funds have also had to inflate orders just to get a
look-in on a deal.
"It has been quite difficult and challenging for smaller
players, as up until late Q3/Q4 they were locked out of
earlybirds where whole deals were placed with the bigger funds.
The smaller funds realised they had to be smarter to engage in
deals and they are doing that by giving larger tickets to get
through the door," a leveraged loan head said.
Most banks are against the practice of inflating orders, but
they differ when it comes to their method of scaling back
allocations. While some banks scale back evenly across a book,
others will give preference to some of the larger funds, which
will then end up with bigger tickets, leaving a large number of
smaller funds to divide up a fraction of the deal.
There have been a lot of occasions when smaller funds have
been allocated the minimum hold on a deal of 1m and in some
deals the minimum amount has been reduced to 500,000.
A lot of it comes down to how influential and hands-on a
sponsor is. Some sponsors will run a book and determine the
composition of the deal, restricting it largely to the funds
they know well.
Although zero allocations are not common practice in the
loan market, an account could be zeroed if it doesn't get on
with a sponsor or desk.
"No-one has officially been zeroed, unless someone has
ticked off a sponsor or crossed someone off the wrong way. We
have heard from accounts they have been zeroed anecdotally," the
second leveraged finance banker said.
If the technical dynamics seen in 2016 continue into 2017,
which is expected for the first quarter at least, then the loan
market could start seeing zero allocations.
"We haven't done a zero yet. In the high-yield bond market
it is common practice, but we haven't really seen that yet in
loans. There are books where the smaller market participants are
getting the minimum hold but it hasn't got to the point where it
is so rude that funds are getting zeroed - but we could get
there this year," a syndicate head said.
Technical pressure is driving pricing tighter and UK
forensic sciences group LGC and Webhelp are in the market
repricing deals from January and February last year,
Pricing is likely to continue to tighten and by March, the
market could be swamped with deals that reprice the repricings
conducted in the last quarter of 2016, once six-month soft call
Tightening CLO prices will make it easier for CLOs to remain
invested in the lower-yielding credits, fuelling more
oversubscriptions and scale-backs.
For the foreseeable future, 2017 is a borrowers' market,
while investors will continue to suffer and struggle for paper,
a second investor said.
(Editing by Christopher Mangham)