NEW YORK, Jan 13 (Reuters) - At least one large investor has requested that the loan backing the buyout of Petco Animal Supplies IPO-PTAS.N be issued without a feature that had previously helped boost spreads but now threatens returns to some Collateralized Loan Obligation (CLO) investors.
Other firms considering investing in the US$2.5bn loan for the pet retailer have also asked Citigroup, one of the banks arranging the financing for private equity firms CVC Capital Partners and the Canada Pension Plan Investment Board (CPPIB), to eliminate the Libor floor on the loan, sources said.
Libor floors are added to credits to protect investors in lower interest rate environments by setting a limit on the benchmark and guaranteeing a spread minimum. However, some investors say such protection has run its course after boosting returns by about 7% in the riskiest portions of CLOs.
CLOs, the biggest buyers of leveraged loans, have benefited from this feature since the credit crisis when Libor floors helped boost yields after three-month Libor fell from a 10-year high of 5.72% in September 2007 to below 1% in May 2009.
Three-month Libor, the benchmark loans spreads are based on, rose 91% to 62bp Wednesday from 32.4bp on October 1.
It is unclear if Petco’s banks will create a tranche that does not include a floor but may consider the option if it attracted additional investors to the deal, a source said.
Banks are contemplating issuing at least one other loan without a floor this week, a source said.
A Citigroup spokesperson declined to comment. A Petco spokesperson did not immediately return a telephone call seeking comment.
Ninety-eight percent of first-lien term loans issued in 2015 until the end of November included Libor floors, typically of 1% or 0.75%, according to Thomson Reuters LPC. (Editing By Michelle Sierra and Jon Methven)