June 25, 2019 / 4:42 PM / 20 days ago

CORRECTED-Sealed Air US$475m loan challenges bank appetite

(Corrects headline to clarify new loan)

By Michelle Sierra

NEW YORK, June 25 (LPC) - Packaging company Sealed Air is wrapping up a US$475m term loan A (TLA) that has challenged banks’ return models and pushed the limits on their appetite for funded assets.

In a bid to attract demand from banks eager to generate additional income and boost profitability, Ba2/BB+ rated Sealed Air made a play to nab a funded term loan at a lower cost than its existing revolving credit facility. Typically, term loan debt is as costly as a revolving credit line, unlike in the real estate or asset-based lending markets where prices might differ.

“They looked to price this tighter than their core revolving credit mainly to bet that there is a subset of banks very hungry for funded paper,” a banker following the transaction said. “They did it as an asset purchase, at a very aggressive price.”

The Sealed Air financing that backs the company’s US$510m cash acquisition of bagging systems maker Automated Packaging Systems comes on the heels of heightened demand for TLAs in 2019, a segment of the bank market that historically has registered fluctuating levels of interest from banks.

Year-to-date TLA volume comprised 25% of leveraged non-institutional issuance (revolving credits and TLAs), according to data from LPC, a unit of Refinitiv. In the first half of 2018, TLA volume comprised 23% of leveraged non-institutional issuance.

The move concurrently challenges a bank’s return model that has historically offered a spread premium for double-B loans with relatively low risk.

The company offered the new US$475m TLA at 112.5bp over Libor for a three-year tenor, which is inside the pricing and maturity of the existing US$1bn revolving credit and its US$223m in term loans.

Current pricing on both the revolving credit and the existing term loans is 150bp over Libor. Both loans have five-year maturities and are due in 2023.

“This is a challenge for banks’ appetite for funded loans,” a second banker said.

Though the double-B rated company falls right in banks’ sweet spot, the move is a testament to how much banks’ attitudes toward funded assets have shifted as the cost of funding has improved and loan supply has dried up.

With bank business still under stress in terms of profitability, there is more pressure on income and ways to generate it and banks are less likely to turn away new opportunities to lend.

“It’s aggressive,” a third banker said. “In general, there has been a lack of M&A in the double-B space and a lack of pro rata deals. Banks are desperate looking for attractively priced term loans. That’s why it gets easier.”

“They’re saying if you want to buy it, great. If you don’t, we’ll find someone else,” the first banker said.

Bank of America Merrill Lynch is leading the deal that has been circled but is yet to allocate, the first and third bankers said. BAML and Capital One are the largest lenders of a 12-member bank group, after roughly 15 relationships turned it down, they said.

A representatives from Sealed Air and BAML did not return calls by press time.

NO LOAN, NO PROBLEM

Historically, the bank market has been a source of cheap financing in exchange for the future business that stems from the lending relationship. Because some banks borrow to lend, the differential between what it costs a bank to borrow in the open market and the rate it gets paid to lend is paramount when deciding to commit capital to a lending relationship.

Banks with large US dollar deposits have less of a need to borrow to fund new lending and are eager to get paid for funded assets. Such banks include regional banks, like US Bank, SunTrust and Citizens. Other lenders that have recently showed appetite for term loans include Canadian banks TD Bank and Scotiabank, as well as Japanese and some Indian banks.

European bank appetite varies depending on their cost of capital, which until recently was high given the perceived risk of lending to European institutions as evidenced by the price of their credit default swaps (CDS).

“There was a bit of a panic last year. The ‘Deutsche Bank effect’ hurting everyone. It’s calmed down,” the first banker said.

He was referring to the hit Deutsche Bank’s creditworthiness took in 2018 when the Federal Deposit Insurance Corporation, the US agency in charge of promoting trust in US financial institutions, put the German bank on its “problem bank” list. The cost to insure Deutsche Bank’s debt doubled within a year to 220bp for a five-year CDS.

The price of banks’ CDS has dropped recently, and with that many banks’ cost of funding, making committing to funded assets less expensive — and more palatable.

“Fewer people dislike it now,” the second banker said. “Though it varies from bank to bank, month by month.” (Reported by Michelle Sierra Edited by Jack Doran and Leela Parker Deo)

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