Spreads widen in choppy US leveraged loan market

By Aaron Weinman

NEW YORK, Sept 20 (LPC) - Borrowers in the US leveraged loan market are offering higher yields in September to compensate an investor base wary of a cooling economy and slowdown in global growth.

Corporate borrowers rated in the low, single-B territory and businesses exposed to a potential economic slowdown, are pricing new loans higher at around 500bp over Libor or as high as 700bp.

Loan funds recorded their first inflow, worth US$24.3m, this week, but the 43 previous weeks of consecutive outflows has taken a toll on liquidity. Deals for cyclical industrial companies and firms exposed to weakening consumer demand has created a divided market where deals either fly or crawl.

“Everyone is a little gun-shy and cognizant of the slowdown in the cycle,” said Tim Gramatovich, chief investment officer at Gateway Credit Partners.

Digital imaging unit Shutterfly, rated B2 by Moody’s Investors Service, is offering investors 525bp over Libor for a US$1.285bn leveraged loan that backs the company’s purchase by Apollo Global Management. Restaurant operator Del Frisco’s is raising US$425m at 700bp to support its leveraged buyout by L Catterton.

Since the US Labor Day holiday on September 2, average spreads on loans for single-B rated borrowers have risen to approximately 440bp over Libor, up from an average 410bp in September 2018, according to data from Refinitiv LPC.

A slew of other term loans for single-B rated firms, including a US$1.5bn transaction for Zelis Healthcare, S$440m offering for virtual content provider Ahead Data Blue and a US$195m deal for electronic components manufacturer CPI International, are being guided to investors at 450bp-475bp over Libor, banking sources said.

“As a CLO (collateralized loan obligation) manager, it doesn’t take much for a B3 rated name to hit your triple-C rated bucket,” Gramatovich said, adding that investors are demanding greater compensation for loans teetering on the edge of default status.

SEPTEMBER RUSH

Steeper pricing is not deterring borrowers from tapping the US leveraged loan market, and around 50 transactions have launched into the broadly-syndicated space since the Labor Day holiday in the US, according to Refinitiv LPC data.

Other single-B borrowers, including a US$2bn loan backing satellite company Inmarsat’s acquisition by a consortium of investors led by Apax Partners, a US$550m deal supporting Patrick Drahi’s purchase of international auction house Southeby’s, and Shutterfly are expected to finalize buyout financings by September 20.

Higher-rated companies are continuing to achieve tighter spreads than their lower-rated peers, as risk averse investors line up to lend to less risky companies that are more likely to grow despite an uncertain economic backdrop.

On September 17, Ba2/BB+ rated Sensata Technologies, which specializes in industrial technology, offered a US$913m loan at par and a spread of just 175bp over Libor. And Ba2/BB- rated water management firm Advanced Drainage priced a US$700m first-lien loan at 225bp over Libor after guiding it at 275bp-300bp, sources said.

“All types of borrowers are taking advantage of how open the capital markets are in September,” a portfolio manager said, adding that investors are more willing to commit to safer bets such as leverage-neutral refinancings or lend to companies in high growth sectors such as technology. (Reporting by Aaron Weinman. Editing by Tessa Walsh and Michelle Sierra.)