March 24, 2016 / 2:04 PM / 2 years ago

LPC: Investor demand revives U.S. leveraged loan refinancing

NEW YORK, March 24 (Reuters) - U.S. companies including payment technology firm First Data Corp and electricity generator Atlantic Power Corp are starting to refinance leveraged loans in a sign that conditions in the beleaguered market could be improving slightly as inflows and increased investor demand create a window of opportunity for firms to extend debt maturities.

Leveraged loans have seen two weeks of small inflows, breaking a 32-week streak of outflows and refinancing activity, which first reappeared in the U.S. high-yield bond market after five weeks of strong inflows, is finally starting to appear in the more selective loan market.

Volume is sharply lower in the U.S. leveraged loan market this year after volatility pushed pricing higher in late 2016 and banks have struggled to underwrite new deals as they tried to sell an overhang of deals left over from last year.

Only $34.5 billion of loans have been refinanced so far this year, which is 33 percent lower than the same period of 2015. Companies refinanced a total of $377.4 billion of debt last year.

“After a long lull with very infrequent or even absent refinancing activity, the tone has improved enough that at least the higher quality end is starting to be able to tap the market,” said a senior investment banker.

Healthcare company HCA Inc reopened the refinancing market on March 4 with a $1.5 billion refinancing and more companies are expected to follow to extend looming maturity dates up to 2018, particularly after high-yield bond and leveraged loan yields dipped in February.

First Data and Atlantic Power announced plans to tackle 2018 maturities Tuesday, after chemical firm Huntsman Corp unveiled a refinancing the previous week to refinance nearer term 2016 and 2017 maturities with a new $550 million, seven-year term loan. Huntsman was able to reduce its borrowing cost slightly by tightening the discount to 99.5 last Wednesday from 99 after the deal was well received by investors.

“Given the high-yield index has tightened 200 basis points since February 11, we’re seeing more opportunistic issuers decide to access the market,” another senior investment banker said.

First Data is trying to refinance and extend the maturity of a $4.9 billion term loan and a $1 billion term loan which were due to mature in March and September 2018, respectively, by adding them to a term loan due in 2021. The loans were priced at 350 basis points over Libor, but pricing will rise to 400 basis points in line with the existing $1.2 billion 2021 term loan. Pricing is being guided in the 99.5-99.75 range.

Electricity generator Atlantic Power also launched a $910 million refinancing to address upcoming maturities, including a 2018 date, and refinance other existing debt, according to a regulatory filing. The deal, which is led by Goldman Sachs and Bank of America Merrill Lynch consists of a $700 million seven-year term loan and a $210 million five-year revolving credit facility.

The new revolving credit will replace Atlantic Power’s existing revolving credit facility, which is due in February 2018 and also refinances an existing term loan which is due in February 2021, which has $473.2 million outstanding.

Gelatin capsule manufacturer Capsugel is also asking lenders to extend $747 million of outstanding debt due in 2018 to 2021 by adding on a $200 million term loan and increasing the spread by 25 basis points. PUSH TO REFINANCE?

The impetus for the return of refinancings may be coming from banks trying to drum up business after months of inactivity as concerns over oil prices and the economic situation in China combined with slow earnings in the United States caused banks and investors to back away from highly leveraged deals.

Leveraged buyout activity and leveraged corporate acquisition activity has fallen dramatically as well as refinancing volume, potentially leaving a big hole in banks first quarter earnings and budget targets.

Fitch said Tuesday that underwriting revenue at banks has dropped off dramatically. JP Morgan saw a 43 percent drop in bank debt underwriting revenue to just $602 million in the fourth quarter of 2015 compared to $1.05 billion a year earlier. Bank of America saw a 31 percent drop for the same time period, posting underwriting revenue of $618 million in the fourth quarter of 2015.

“Our pipeline has thinned out as you might imagine, so we are looking to see what kind of other activity might be out there,” said the first banker.

Banks are bringing the strongest credits to the market first and are looking for issuers with a strong track record. HCA fit the profile and was first to market with a $1.5 billion term loan B-6 to refinance debt which priced at 325 basis points over Libor at the tight end of guidance. The size of the deal was however reduced to $1.5 billion after the company increased its high-yield bond by $500 million.

Although the refinancings should boost banks income, volume is unlikely to catch up to the levels of the previous two years. Total institutional volume topped $454 million in 2015 and $639 million in 2014.

“We’re running volumes that are materially behind last year,” the banker said. (Reporting by Jonathan Schwarzberg; Editing by Tessa Walsh and Michelle Sierra)

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