| NEW YORK
NEW YORK May 19 Companies with strong earnings
and good trading track records, including telecommunications
provider CenturyLink and food company Post Holdings, are tapping
the US leveraged loan market at ever-tighter spreads as investor
demand remains strong for floating rate assets.
At the same time, similarly-rated issuers such as
nutritional supplement maker GNC and lift trucks maker
Hyster-Yale are facing higher pricing as lenders demand better
economics for taking higher risk in weaker sectors.
This split is emerging in the highly liquid US leveraged
loan market despite strong demand as investors try to protect
their portfolios against late cycle credit risk and poke holes
in deals that are potentially vulnerable to a downturn.
“Job number one for institutional investors in credit
markets is to avoid big losers,” a senior banker said. “Credit
analysis 101 tells analysts and portfolio managers that where
they see smoke it can lead to fire. Selling a loan at 80 cents …
offsets dozens of successful loan purchases that are performing
Times could not be better for issuers with strong track
records, especially for the biggest, most liquid loans. Demand
has been stoked by 27 consecutive weeks of inflows to loan
funds, which have added a total of approximately US$15.8bn to
the retail market this year alone, according to Lipper.
CenturyLink proved so popular that it increased the size of
a proposed term loan this week to US$6bn from US$4.5bn and
lowered pricing on the Bank of America Merrill Lynch-led deal to
275bp over Libor from guidance in the 300bp-325bp range.
The deal backs the company’s acquisition of
telecommunications company Level 3, and the increase allows the
company to replace a proposed offering of secured notes.
Post Holdings also increased the size of a Credit Suisse-led
term loan backing its purchase of Weetabix to US$2.2bn from
US$2bn. The additional funds allowed the company to lower the
amount of the balance sheet cash used to back the Weetabix
purchase and a tender offer. The loan was rated Baa2/BB-.
The company also cut pricing to 225bp over Libor from
guidance of 250bp over Libor during syndication, which is the
lowest pricing seen on a loan from a B2/B rated issuer this
year, according to Thomson Reuters data.
“Investors are pricing the risk,” said a senior banker. “And
the risk is much, much higher for story deals than Post. Post is
probably misrated in the minds of most investors as well. Most
look at it as a double-B type credit given its stability.”
EAGER FOR DOUBLE B
Investors have been eager to pick up double-B paper such as
pet food maker Blue Buffalo, which this week firmed pricing at
200bp on a US$400m term loan. The deal includes a 25bp
leverage-based stepdown. The company is issuing the loan at par
as opposed to the originally proposed discount of 99.5.
Citigroup leads the transaction.
Pricing is still diverging in this ratings bracket despite
strong demand. Hyster-Yale is paying 400bp over Libor for a
US$200m term loan despite being rated slightly higher by the
agencies than Post.
The corporate rating is B2/B+, and the facility is rated
B1/BB. However, pricing on the Bank of America Merrill Lynch-led
deal came in lower than the originally suggested range of
“You’ve got situations where we don’t agree with the ratings
agencies,” a portfolio manager said. “Look at Hyster-Yale. It’s
double-B, but it’s the fifth player in a highly cyclical
industry. It’s not a bad business, but it’s not a double-B
business that deserves tight pricing. We’ve seen those types of
businesses get into trouble.”
Some companies are finding the proposed pricing too
expensive. GNC ended up pulling a proposed extension of its term
loan on May 11 after the company could not get the deal done
with the proposed coupon of 450bp.
Coronado Coal is another issuer in a tricky sector that has
seen pushback from investors. The company is lining up a US$200m
loan via Bank of America Merrill Lynch to back a dividend and
saw pricing set at 700bp over Libor with the discount widening
to 97 from 98.5.
Although the deal carries high pricing, it is an improvement
from last year. The company would have been unable to tap the
market in 2016, a banker said, as investors were wary of any
deals with energy exposure as commodity prices such as oil and
Coal companies began testing the water in the first quarter
as Arch Coal priced a US$300m term loan at 400bp over Libor.
Pricing tightened from guidance of 450bp as the deal went to
market after coal prices climbed more than 50% from October
“When the market is hot, inevitably you are going to get
deals that push the limits on leverage and structure and
pricing,” said Thomas Hauser, a senior portfolio manager at
Guggenheim Investments. “Credits that couldn’t get financed in
markets with a lesser tailwind try to price their deals because
of insatiable demand.”
(Reporting by Jonathan Schwarzberg and Andrew Berlin; Editing
By Tessa Walsh)