Demand for leveraged loans ignites market, concerns on risk

By Aaron Weinman

NEW YORK, Feb 5 (LPC) - US companies returned in droves to the US leveraged loan market to cut borrowing costs throughout January, taking advantage of investors’ white-hot demand for high-yielding assets and a benign market sentiment.

US banks’ strong earnings results for the fourth quarter, and reduced geo-political fears over a trade war between the US and China lifted the institutional term loan pipeline to US$87.6bn at January 31, up from US$53.1bn a week prior, according to data from Refinitiv LPC. This is approximately three times higher than the same period last year, according to the data.

Investors’ pockets are flush with cash looking for a home, and borrowers have leveraged this to either reprice their debt at ultra-low rates or obtain cheap new cash for acquisitions that may have been difficult to execute a year ago.

“Some new issues last year were credits not everyone loved, and while they were priced well, some people turned them down,” said Michael Herzig, senior managing director at First Eagle Alternative Credit. “Those people, seeing today’s strong market, probably wish they bought some of those credits then.”

NEW YEAR, NEW EYES

Lineage Logistics is a case in point.

Last month, storage warehousing firm Lineage launched a transaction to raise US$300m in debt that it would attach to an existing term loan, banking sources said.

Proceeds were slated to back Lineage’s acquisition of Emergent Cold, a temperature-controlled logistics firm with a presence in Australia, New Zealand, Vietnam and Sri Lanka.

In November, the US company went as far as Australia to meet investors and contemplated raising the money on a cross-border basis, sources in the US and Asia-Pacific said, but held off on completing a transaction as demand cooled for lower-rated companies.

“Last year Lineage brought a straight-forward transaction to the market and it was like looking under every rock for every last dollar to subscribe to the deal,” a banking source said. “They could barely get an incremental across the line. What a difference a year makes.”

Fast forward to 2020, Lineage opted to raise the funds entirely in the US. The company not only obtained enough demand to fund Emergent Cold, but it upsized the incremental loan twice to US$500m last month. The debt was offered at 300bp over Libor, in line with the company’s existing loan, and with no discount, sources said.

Credit Suisse led the transaction. KKR and Barclays were also part of the arranging group. Investment firm Bay Grove Capital owns Lineage.

The company was not immediately available to comment.

RUSHING THROUGH

Lineage is far from the only company taking advantage of the benign credit environment.

So far this year, repricings have swept up the marketplace, while the few new money offerings have also been able to squeeze investors for every last penny.

Last week, ice cream company Froneri finalized a US$6.3bn-equivalent, dual-currency financing backing its acquisition of Nestle’s US ice cream business.

Part of the debt package was a US$245m second-lien term loan that was offered at 575bp over Libor, which is some of the lowest pricing seen on a syndicated second-lien facility since 2007, sources said.

Advertising firm Lamar Media also cut the rate on a US$600m loan to 150bp over Libor, a coupon that is also among the tightest seen on a broadly-syndicated loan since 2007.

“The market was on fire in January. New issues were oversubscribed and flexing tighter,” said Lauren Basmadjian, a portfolio manager at Octagon Credit.

APPETITE V. PROTECTION

Robust demand, however, limits investors from driving real documentation change in loans’ credit agreements.

Borrowers are capitalizing on investor appetite to push through aggressive terms in companies’ favor. Investor protections weakened in the syndicated leveraged loan market at the end of the third quarter of 2019, according to data from Moody’s Investors Service.

That deteriorating protection came despite new issue volumes declining from the second quarter to the third, the ratings agency said in a report on January 23.

Investor concerns over reduced protections include a borrower’s ability to minimize how much excess cash companies must have leftover to pay down debt or neglecting to treat existing and new lenders equally.

“(Borrowers) chip away at credit protections, especially in markets like this where they know that managers have cash to put to work.” (Reporting by Aaron Weinman. Editing by Michelle Sierra and Jack Doran.)