TRLPC: Increasingly selective loan buyers demand higher prices

By Jonathan Schwarzberg and Leela Parker Deo

NEW YORK (Reuters) - A pricing correction in the U.S. leveraged loan market prompted by institutional buyers demanding to be paid more in exchange for taking on increased risk has led to four borrowers withdrawing opportunistic loans in the face of inadequate appetite and forced others to pay steeper borrowing costs for acquisition and buyout related loans.

Investors have become more selective as a result of macro concerns about China’s weakening economy, deflated energy prices, and the Federal Reserve’s decision to leave interest rates unchanged in September.

“The market is as choosy as can be,” said one arranger.

Within the past two weeks, contact lens distributor ABB Optical withdrew a US$650m financing, travel company Apple Leisure pulled a $510m deal and SiteOne Landscape Supply abandoned a US$350m term loan. All three were slated for dividend recapitalizations. Xerium Technologies also put the brakes on a $495m refinancing.

The loan market had been holding up well compared to high-yield bonds but has been slipping overall. The SMi100 average bid was 98.21 on October 6, down from 99.62 as recently as July 21, according to Thomson Reuters LPC data.

“The effects of overall market volatility had been muted on the loan side compared to the bond side,” said an investment banker. “But there has been a bit of leakage in terms of loans widening recently.”

Investors tend to gravitate to the secondary market when prices fall, preferring the safety of known names and the ability to buy existing paper at discounted prices as opposed to spending capital on new credits at higher prices, bankers said.

Overall institutional term loan yields increased to 5.4% in the third quarter from 5.0% in the second quarter, according to LPC data. Large corporate yields jumped to 5.1% from 4.8% while middle market yields moved up to 6.3% from 6.0%.

STRUGGLING

Aside from the four canceled loans, other deals have struggled to attract appetite in the market, including the financing for Apax Partners’ acquisition of plus-sized retailer FULLBEAUTY Brands. The deal, for which JP Morgan, Jefferies, Goldman Sachs and Deutsche Bank provided commitments, is being reworked after struggling to attract investors.

Standard & Poor’s rated the proposed US$820m first-lien loan B- and the US$345m second-lien loan CCC, while downgrading the company to B- from B due to leverage that will increase to above 7.0 times with the financing.

The spread on window component manufacturer Quanex Building Products’ new US$310m covenant-lite acquisition term loan cleared 150bp wider than initial price guidance. The loan allocated at 525bp over Libor, increased from 375bp over and the discount deepened to 98 from 99.

IT management software provider HelpSystems was pressured into widened pricing on a US$465m loan backing its buyout by HIG Capital. The company raised first-lien pricing by 50bp and second-lien pricing by 75bp.

Universal Fiber Systems also increased pricing on both the first-lien and second-lien portions of its US$240m buyout loan. Final pricing on the first-lien loan cleared at 550bp over Libor, up from guidance of 475bp-500bp, while the second-lien term loan settled at 950bp over Libor, up from 850bp-875bp.

IT company Idera likewise was forced to flex the spreads on a US$425m covenant-lite acquisition loan. Pricing on the first-lien term loan was upped to 550bp over Libor from 475bp-500bp over Libor, while second-lien term loan pricing finalised at 950bp over Libor, up from 875bp-900bp.

(Editing By Chris Mangham and Jon Methven)

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