May 26, 2016 / 2:43 PM / 2 years ago

LPC: Weak secondary market could rein in refinancing wave

NEW YORK, May 26 (Reuters) - A repricing wave has hit the loan space as US borrowers attempt to lower the spread of their existing term loans, though a weak secondary market signals that not every company will get their wish.

Component manufacturer US Farathane and beer maker Pabst Brewing were among the first names to pull off refinancings as the market moved on from the volatility that hit in the second half of 2015. US Farathane shaved off 50bp from its US$360m term loan to 400bp over Libor with a 1% floor, while Pabst slashed 100bp from its US$474.5m term loan to 475bp over Libor with a 1% floor.

Others borrowers slashing pricing are grocer Albertson’s, networking firm Riverbed Technology and textbook publisher Cengage Learning.

“The loan market is a little ahead of itself,” said Steven Oh, head of fixed income at PineBridge. “It doesn’t feel like the market is strong enough for these repricings.”

Despite the recent spate of deals, the secondary market is weaker than in other periods when issuers successfully cut pricing. Since February, the average bid for the SMi100 composite - the 100 most widely-held loans - has rallied 3 points to 98.32, and the average bid in the overall market has gained 1.33 points to 95.73. However, both are substantially below their levels during last summer’s repricing wave, when the average bid for the SMi100 was above 99 and the overall market above 98.

“I don’t see enough pushback to prevent the repricings for good quality credits, but the test will be when higher risk credits attempt to reprice,” said Oh.

Furthermore, the percentage of loans trading above par, the siren call to reprice, was 39.5% for the SMi100 and 13.9% for the overall market on Tuesday, far short of the 65% and 36% spring a year ago during the last repricing wave.

By these metrics, the secondary market now looks less robust than when Cengage and others shelved repricing attempts last June.


The primary reason repricings are appearing is the dearth of new issue loans. The repayments of term loans, such as Cequel and Jardin, as well as Dell’s smaller-than-expected term loan, are also contributing factors that have left investors with cash to deploy.

Demand is overwhelming supply, in particular for loans that fit into CLOs. And new CLO formation climbed to US$17.6bn as of May 19 after less than US$1bn of deals priced in January, but that total was down 62% over the same period last year.

“CLOs in particular don’t want to lose assets,” said Oh.

Though many of these repricing deals are expected to clear, market participants expect the number of companies successfully lowering borrowing costs to be smaller than in repricing waves of past. Furthermore, they point to the fragility of the recent market tone and suggest that this repricing spigot could tail off soon.

Additional reporting by Jonathan Schwarzberg. Reporting by Lisa Lee; Editing By Chris Mangham and Michelle Sierra

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