January 20, 2017 / 2:53 PM / 9 months ago

LPC: Insatiable demand for floating rate assets cuts borrowing costs

NEW YORK, Jan 20 (Reuters) - Almost a third of the $875 billion leveraged loan market has taken advantage of huge demand for floating-rate assets to cut pricing on existing debt over the last year, shaving interest payments by millions of dollars, and the floodgates are still wide open, lenders said.

Investors are increasingly piling into the asset class as the Federal Reserve has started raising interest rates and is seen hiking more this year, driving low-rated companies back to the market in hoards to slash borrowing costs before issuing debt becomes more expensive.

Companies are often returning to the market quickly after arranging loans to reprice the debt at more favorable terms, without much resistance from existing investors who are easily replaceable by others eager for debt that will adjust with rising interest rates.

Loans are generally issued without strict limits on repayment, which makes refinancing easier than other asset classes like bonds, which usually may not be paid back within three or four years.

In one case this week, satellite services operator Telesat launched a repricing just two months after arranging the loan.

“With technicals so strong amid growing investor demand, issuers are in the driver’s seat at the moment,” said Chris Remington, institutional portfolio manager at Eaton Vance. “We do expect asset class buyership to grow in 2017, and all else equal that could allow for more refinancings ahead.”

REPRICING FEVER

Companies have repriced or refinanced $44.6 billion of loans this year through January 17, with billions of dollars more slated before February, putting January on pace for one of the largest months ever for these transactions, Thomson Reuters LPC data shows.

The current volume is almost 50% higher than the most repricing to this point over the last five years, which came in at $30 billion in 2014. At that time, investors were jumping into loans preparing for rising interest rates that didn’t pan out until December 2015 and then again in December 2016.

In the absence of rate hikes, investors pivoted and withdrew from loan funds during much of 2014-2015. Now the Fed has actually raised rates twice in the past year and upgraded its forecast to three hikes this year from two, reawakening demand.

Investors have added more than $10 billion over the last ten weeks to bank loan funds, according to Thomson Reuters Lipper.

Remington said the average spread shaving has been 50-75 basis points. About a third of the market has repriced, ultimately translating to a 0.2% reduction in income generation power.

“Every sector is seeing loans trading above par and repricing except for energy and retail,” said a banker.

QUICK HITS

Loans typically have six months or one year of soft call protection, requiring issuers to buy them back at 101 cents on the dollar if repriced during that period. Because of this, many deals wait until this protection rolls off.

In cases like Telesat, however, issuers are willing to pay the call protection premium to secure the lower rates. Telesat expects to drop its interest to 325 basis points over Libor from 375 basis points over Libor, sources said.

“Companies are striking while the iron is hot,” the banker said.

While much of the repricing has been done among the higher-rated end of the leveraged loan class, the market’s strength has also allowed some lower-rated companies with loans that didn’t initially perform well to take advantage.

Business software maker TIBCO Software on Wednesday lowered pricing on its $1.64 billion term loan to 450 basis points over Libor at par.

The company priced the loan at 550 basis points over Libor in November 2014 to support its leveraged buyout by private equity firm Vista Equity Partners. At that time, it had to sell the loan at a discount of 95 cents on the dollar.

Companies are seen maintaining access to lower cost borrowings as long as rising yields help overshadow shrinking spreads.

“With the Fed telegraphing three rate hikes this year, remember that what’s lost in the spread could very well be made up in a rising adjustable base rate,” said Remington.

Reporting by Jonathan Schwarzberg and Lynn Adler; Editing By Michelle Sierra and Chris Mangham

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