NEW YORK, Sept 8 (Reuters) - US companies are borrowing more to cut costs, extend loan maturities and pay down junior debt than to raise new money for mergers or leveraged buyouts (LBOs), in a growing trend that could extend through year end.
The leveraged loan market’s price surge over the past six months, combined with lingering low interest rates and robust investor demand, is driving a burst of refinancing and repricing of existing deals until M&A and LBO activity heats up.
The widespread borrower list has propelled refinancings and repricings to 53% of total leveraged loan issuance this quarter, on track to top last year’s pace, according to Thomson Reuters LPC data. The year-to-date share of 48% matches full-year 2015, the highest since 58% in 2014.
“Everything is going to reprice that can, and that scream is going to get louder,” said Lauren Basmadjian, portfolio manager at Octagon Credit Investors.
The current burst of refinancing activity includes companies with weaker credits looking to streamline or otherwise alter their capital structure. Among them, security company Monitronics is in the market with a US$700m loan, and educational software provider Blackboard Inc is seeking to amend and extend its US$984m term loan B-4.
“Almost everything is opportunistic,” with pent-up refinancing, repricing and dividend deals, said a senior banker. “There’s cash in the system and not enough in new-money issuance. We need US$50bn, US$60bn or US$70bn in new-money deals.”
A quick pick-up in M&A activity is unlikely, based on looming year-end uncertainties including the US elections and Federal Reserve policy decisions, investors and bankers said. LBO business, meantime, has been contained by regulations limiting the amount of debt taken in those deals.
New loans accounted for more than 90% of tepid leveraged loan issuance in the first quarter, when a perfect storm of worry over low oil prices, as well as the U.S. and Chinese economies, sidelined investors.
A strong secondary loan trading market is additionally helping companies refinance their debt and improve some low-rated borrowers’ credit quality.
“After the market recovered over the past six months or so, half of the loans are trading above par, making those loans most susceptible to being repriced,” said Craig Russ, co-director of bank loans at Eaton Vance.
In February or March, when many loans were trading around 90 cents on the dollar, there was little opportunistic availability for refinancing to lower coupons, pay dividends or to take out junior debt, he said.
Now that demand has escalated, more companies are making issuer-friendly adjustments to existing debt while also appeasing investors.
Cablevision is one example, with a plan to issue unsecured notes and pay down half of its outstanding term loan.
The company will refinance the existing US$3.8bn term loan into a new US$1.9bn term loan, thereby reducing senior secured leverage and improving the credit from that standpoint, said Russ. Reflecting that quality upgrade, he said, Cablevision is lowering the coupon on the new loan.
The refinancing pace has heated up since Labor Day with plastics company Ineos Styrolution launching a cross-border 1.102bn-equivalent loan, Air Canada seeking a US$720m term loan, and information technology staffing firm Insight Global shopping a US$170m add-on.
In addition to straight refinancing, several companies came to the market after the holiday to extend their existing credit facilities. These include auto parts company Allison Transmission’s US$1.7m facility, telecommunications technology provider NeuStar’s US$699m facility and grocery store chain Smart & Final’s US$595m facility.
Companies are looking to avail themselves of yields that have dipped to levels last seen around this time last year.
The average yield is 5.44% so far in the third quarter. Last year at this time it was 5.39% before jumping to 6.14% in the fourth quarter and then rising further to 6.53% in this year’s first quarter.
“Clearly the strength we’ve seen in the credit markets since the first quarter has created a window of opportunity for a few issuers who weren’t excited about what they’d have to pay and wouldn’t have considered it, but are now looking at an attractive proposition in order to push out maturities or to lower coupons,” said Jonathan DeSimone, managing director at Bain Capital Credit. (Reporting by Lynn Adler and Jonathan Schwarzberg; Editing By Michelle Sierra and Jon Methven)