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LONDON, March 9 (Reuters) - Strong investor demand for paper has allowed Swedish home alarm company Verisure to squeeze pricing on an increased €425m refinancing to 300bp, marking a dramatic erosion of yield in Europe’s leveraged loan market within the space of a few weeks.
Pricing has fallen heavily since the start of 2017 with little resistance from investors, who have few alternatives and need to put money to work. Sponsors initially drove pricing down on portfolio companies via repricings and refinancings but have since taken advantage of the deep liquidity on offer to target new deals.
“At first people said the extremely tight yield would be for repricings only but now we are seeing it on new deals as well,” a senior leveraged banker said.
The drop in pricing started as a gradual shift, with sponsors testing 375bp-400bp at the turn of the year for some deals.
Buyout loans for French medical packaging manufacturer Unither and Germany-based building materials maker Xella both priced at 400bp at the beginning of February, which felt tight, given SLV’s acquisition loan closed at 425bp in December.
Some very popular loans broke through the 400bp barrier and came with a three handle, including the euro portions of UK forensic sciences group LGC’s repricing and Belgian aluminium systems manufacturer Corialis' buyout loan, which priced at 375bp in late January and early February, respectively.
Within the space of a few weeks, any initial reservations of launching a loan with a three handle has gone and pricing within that space has rapidly eroded from 375bp all the way down to 300bp.
“Pricing tumbled and the market has tightened since January by 75bp-100bp. That is quite a lot for the loan market. Darling credits are now coming at 300bp,” a second senior leveraged banker said.
Verisure’s loan, which allocated on Wednesday afternoon, tightened pricing prior to close to 300bp, with a 0% Libor floor at par. Pricing guidance of 325bp-350bp was issued on March 6 and was cut to 300bp-325bp on March 7, before settling at a final price of 300bp on March 8.
“Verisure hit a recent historic low in terms of 300bp, that’s a hell of an achievement,” a third senior leveraged banker said.
On March 7, European medical laboratory services operator Cerba Healthcare guided pricing on its €544m term loan at 325bp-350bp, with a 0% floor at par that backs its buyout by Partners Group and PSP Investments and will partially refinance existing debt.
With commitments due on March 22, they still have time to gauge appetite and cut pricing.
“The reduction in European pricing has been extraordinary over the past 2-3 weeks. In June 2016, people would have been doing cartwheels to achieve 500bp. Prices began to come down and test 400bp at the turn of the year, which felt like a line in the sand for CLO liabilities and was also an emotional barrier. As soon as the barrier broke to 375bp, the shift down to 350bp, 325bp and even 300bp has been exceptionally rapid. My money is on Cerba getting to 300bp,” a syndicate head said.
Despite having a massive amount of liquidity to put to work, CLOs and warehousing CLOs are going to struggle to invest in deals with such low pricing.
Although CLO themselves have undergone a recent repricing and can accommodate a select few leveraged loans offering yields with a three handle, they are unlikely to be able cope with a wholesale downward shift in pricing, as they attempt to service their liabilities.
This could lead to a division in the market between what CLOs and managed accounts and credit funds are able to invest in.
“We have got to a point where CLOs are going to struggle to play -- they need 375bp-400bp. They can manage part of a portfolio going down to 325bp-350bp, but if more deals come through in the mid-300s range, some CLOs will struggle and we may see a bifurcation between what CLOs and credit funds can do,” the third banker said.
Although Single B rated companies are starting to enjoy the lower pricing that higher rated Double B companies have been able to access, 300bp is likely to be the limit, as even credit funds will struggle to provide paper below that level.
“Pricing of Single Bs has tumbled but it has tumbled to where Double Bs were and the reason as to why Double B pricing has stayed static is that there is not as much money available to be able to go to yields below that. We’ve hit a floor for darling Single B credits,” the second banker said.
It calls to question whether there is enough pricing differentiation in Europe’s leveraged loan market, if the majority of credits are pricing within such a narrow interest margin range.
“There are always exceptions to the rule for tricky, individual credits but for run of the mill names, the only differentiation is rating and individual company performance and based on that, there is a pretty narrow pricing range,” the second banker said.
Editing by Christopher Mangham