October 16, 2019 / 5:24 PM / a month ago

US investors balk at US$900m in B rated loans as US economy cools

NEW YORK, Oct 16 (LPC) - At least US$900m of institutional loans being marketed for US companies have stalled this week, as investors wary of an economic downturn have balked at debt that may offer higher chances of default.

Overdue deals include a US$225m loan supporting the leveraged buyout (LBO) by Ares for winery Cooper’s Hawk and a US$425m transaction for font software firm Monotype Imaging, which is being acquired by HGGC.

These Single-B rated (B1/B+, B2/B and B3/B-) offerings were due from October 4 through October 8, but have so far failed to garner enough interest from an investor base wary of LBOs for companies that may struggle to service their debt as the economy cools.

“Single-B rated LBOs have had a lot more difficulty in the market of late and people are repricing the level of that risk profile,” said Ryan Kohan, a portfolio manager at Western Asset Management.

In September, Single-B rated loans for auction house Sotheby’s, digital imaging firm Shutterfly and artificial intelligence firm Cerence, among others, were all amended to include greater lender protections and sweeter spreads.

Another deal still in market, the Hard Rock Casino’s US$325m loan to finance the construction of a new venue in northern Indiana, was also due on October 10, banking sources said.

A US$285m term loan for railroad operator Patriot Rail & Ports lingered beyond its original deadline date of October 9, but priced on Tuesday at 525bp over Libor and a discount of 98 cents on the dollar, sources said. The seven-year loan was initially offered to investors at 475bp-500bp over Libor and a discount of 99 cents. High Liner Foods on Tuesday also wrapped up a US$300m loan at 425bp over Libor, one week beyond the initial deadline date.

Bank of America Merrill Lynch is leading the transaction for Cooper’s Hawk and RBC Capital Markets arranged the deals for High Liner and Patriot. Deutsche Bank is lead left arranger on Monotype’s loan and Credit Suisse is working on the financing for Hard Rock. A spokesperson for Credit Suisse declined to comment, while spokespersons for each other bank did not respond to a request for comment by press time.

BETTER SAFE

Collateralized Loan Obligation (CLO) managers, which hold more than 60% of the approximately US$1.2trn leveraged loan market, have also become increasingly critical of single-B loans.

Single-B rated loans have saturated the market over the last two years. The loans made up 64% of the leveraged loan universe at the end of September, according to Eric Rosenthal, a senior director with Fitch Ratings.

But as the economy shifts, those borrowers risk seeing their loans downgraded into Triple-C status, and CLOs may be forced to shed their positions as they are typically limited on the number of loans they can hold with that rating.

“CLOs have stepped in and met demand for loans, but CLOs are not indiscriminate buyers,” said Lauren Basmadjian, a senior portfolio manager at Octagon Credit Investors. “There is a lot less room now for risky assets. CLOs are picking which assets to own, and they cannot own them all.”

Lenders’ preference for less risky loans, including loans with higher credit ratings or borrowers with lower leverage, has also given investors some bargaining power when negotiating new deals. This was evident last month when borrowers had to implement investor-friendly amendments to pricing and documentation.

And this latest batch of delayed deals may well require similar tweaks before they can be priced.

“To get a B3-rated loan through this marketplace, you’re probably going to have to take a discount, or at least be flexible in the structure of the deal,” said Brian Good, a senior managing director at THL Credit.

As the market wrestles with the new dynamic, investor flight to higher quality loans and the greater scrutiny that comes with a risk-off mentality will slow down deal flow this quarter, sources have said.

This cautious approach also makes it tougher for underwriting banks to get deals for highly leveraged companies through the syndicated loan market, particularly for borrowers exposed to a cyclical downturn in the economy.

“There is pressure on primary issuance and this makes for a difficult new-issue market,” Good said. This investor pushback means Single-B rated deals have “got to be compelling” to get sufficient lender support, he said. (Reporting by Aaron Weinman. Editing by Michelle Sierra and Leela Parker Deo)

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