| NEW YORK, April 13
NEW YORK, April 13 US investors are turning to
higher-yielding second-lien loans as primary spreads on US
leveraged loans continue to fall in an aggressive repricing
round and new deals remain scarce.
Second-lien volume of US$8.61bn in the first quarter was
more than five times higher than US$1.54bn booked a year ago
when bank appetite waned amid market turbulence in late 2015.
“The market is incredibly hot right now. In a thin market
people tend to take on risk. Where do they go? To the credits
they know, but further down the risk spectrum,” one investor
Second-lien debt is considered more risky as it sits behind
senior first-lien bank debt in corporate capital structures and
offers higher returns to investors.
Although second-lien loans can be a difficult sell in choppy
markets, loan market conditions are robust and banks and loan
buyers currently have a ‘risk on’ mindset, market participants
Yields on first-lien institutional term loan yields have
sunk to levels not seen since 2004, Thomson Reuters LPC data
shows. Average yields on first-lien term loans were 4.5% in the
first quarter, down from 6.54% a year earlier.
Average yields on second-lien term loans were 9.85% in the
first quarter, compared to 10.78% in the first quarter of 2016,
according to Thomson Reuters LPC data.
This price compression has been driven by unrelenting demand
for yield and floating rate loans since last year as investors
try to hedge against rising interest rates, allowing issuers to
cut borrowing costs with opportunistic refinancing.
Junk-rated companies refinanced a total of US$261bn in loans
in the first three months of the year, leaving the prior 2Q13
record of US$246bn behind.
Retail investors have poured US$12.9bn into bank loan mutual
funds and exchange-traded funds as of April 5, lifting total
inflows since early August 2016 to about US$23.6bn. New
collateralized loan obligation (CLO) issuance, a measure of
institutional demand, was roughly US$16bn in the first quarter.
In another measure of risk appetite, riskier triple-C rated
loans have rallied more than double-B names in the secondary
market since the end of last year.
In early December, the average secondary price for CCCs rose
2.81 points to 87.8 from 84.99 on December 1. The average
secondary price of BB-rated loans increased 31bp to 100.09 from
99.78 in the same time.
Increased appetite for risk assets is creating a broader
buying base for second-lien loans, which includes insurance
companies, pension funds, and alternative asset managers as well
as alternative lenders.
Alternative lenders stepped in to provide privately-placed
second-lien loans when banks stepped away from underwriting
loans for syndication in 2015, which were sold to business
development companies (BDCs) and other direct lenders.
Direct lenders are seeing fewer lending opportunities in a
hot market as banks return to lending and are now targeting
second-lien debt. Direct lenders are still needed at the larger
end of the middle market for issuers in the US$75m-US$100m
Ebitda range, which do not require a broad syndication effort
but are large enough to require a handful of direct lenders of
scale to place the junior debt.
“There are situations where a pre-placed second-lien loan
makes more sense and is useful to sponsors in terms of execution
and certainty,” a middle market credit investor said.
High precision manufacturing services company Tecomet Inc is
in market with a US$835m acquisition loan including a US$225m
second-lien tranche that financial sponsor Charlesbank opted to
pre-place with a trio of investors, including at least two
direct lenders, sources said.
Three of the largest second-lien loans marketed in the first
quarter came via the syndicated loan market, however, and
financed dividend recapitalizations along with first-lien loans.
Barclays arranged a US$690m second-lien term loan for real
estate investment trust Capital Automotive and warehouse
retailer BJ's Wholesale Club's sealed a US$625m second-lien term
loan led by Nomura which was upsized by US$25m during
Life sciences company Avantor Performance Materials also
upsized the second-lien portion of a dividend deal. The company
raised a US$455m second-lien term loan, which was increased from
US$380m at launch and was led by Jefferies.
(Reporting by Leela Parker Deo; Editing By Tessa Walsh and Jon