May 24, 2017 / 3:23 PM / 4 months ago

LPC: US middle market lenders resist pricing erosion

NEW YORK, May 24 (Reuters) - Credit investors are drawing a line in the sand about the rates at which they are prepared to lend to US middle market companies after a wave of aggressive leveraged loan refinancings pulled yields lower in the first quarter of the year.

Increased supply due to a healthy crop of new money deals backing leveraged buyouts, mergers and acquisitions, and add-on activity in the second quarter is helping middle market investors to resist downward pricing pressure.

In May, at least four middle market deals boosted pricing from the initial guidance, including a deal for pet product maker Petmate, according to Thomson Reuters LPC data.

“It’s not a tightening market anymore,” said one middle market loan investor. “The market has reached a point where we need more yield. We have capital to deploy but we don’t need to do it at such a tight price point.”

Yields on middle market institutional term loan yields have risen to 6.22% so far in the second quarter from 6.09% in the first quarter, the data shows.

This reverses three quarters of decline that started in the third quarter of 2016, when yields were 6.65% as the repricing wave accelerated and trickled down to riskier, less liquid smaller deals in the hunt for yield.

Institutional investors, including commercial finance companies and direct lenders, need at least 450bp over Libor to invest in an unrated deal, three banking sources said.

Banks have a lower cost of capital and are therefore able to lend at lower rates, particularly if the deal is rated and meets regulatory guidelines, the sources said.

TOO TIGHT?

A US$262.5m loan backing pet product maker Petmate’s buyout by Olympus Partners is the latest middle market deal to increase pricing. The spread on the buyout loan, which was arranged by middle market specialist Antares Capital, was increased by 25bp to 450bp over Libor with a 1% Libor floor and a 99.5 discount.

Healthcare management services provider Kepro also hiked the spread on the first- and second-lien portions of its US$305m leveraged buyout loan by 100bp from the wide end of initial guidance to 525bp on the first-lien and 925bp on the second-lien and also widened discounts.

Kepro’s loan was priced too aggressively at launch and needed to attract more middle market investors, which typically require higher returns, in order to circle the deal, a second investor said.

All Metro Health Care Services, a provider of non-medical paraprofessional homecare services, also raised pricing by 25bp to 475bp over Libor on the US$225m term loan B portion of a US$255m credit facility that refinances existing debt.

Investors also pointed to two more transactions that were sold to a middle market investor base and recently raised spreads.

Specialty material-based components provider Boyd Corp wrapped a new US$1.09bn acquisition loan which priced at the wide end of revised guidance at 475bp on the first-lien and 875bp on the second-lien.

APC Aftermarket also raised pricing by 50bp to 500bp over Libor on the US$315m term loan portion of its US$515m acquisition credit facility and widened the discount.

Demand for assets is high and the market remains intensely competitive but some investors are no longer willing to take risk in exchange for lower returns and fewer lender protections as structures and terms also loosen.

“Pricing is still tight to a year ago, but we are getting back to where we should be,” a third middle market investor said. (Reporting by Leela Parker Deo; Editing by Tessa Walsh and Jon Methven)

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