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Loan repricings lead to market fatigue as deals pulled

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By Kristen Haunss, Jonathan Schwarzberg and Yun Li

NEWYORK (LPC) – Fatigue for repricings has settled over the $1 trillion (£752.3 billion) US leveraged loan market after more than 275 companies have turned to the segment over the last three months, many to cut borrowing costs, leading some of the most aggressively priced deals to trade off or even be pulled.

American Airlines and aircraft leasing company Avolon are among borrowers that have cut their payments, taking advantage of more than $60 billion that has poured into the US leveraged loan market this year as investors seek a safe haven in the floating-rate product that can serve as a hedge to rising rates. The Federal Reserve has increased rates six times since December 2015.

But the leveraged loan market, which backs buyouts and helps companies refinance existing debt, is becoming weary of the practice as pent-up supply of new loans, along with volatility in equity markets and sovereign debt, has lessened the appetite for opportunistic repricings. A number of loans are now trading below their issue price and some companies have been forced to withdraw their proposals entirely.

American Airlines’ $1.8 billion loan was quoted at 98.625-99.125 Wednesday, below its 99.625 cents on the dollar issue price, after it cut its interest rate to pay 175bp, according to a source. Avolon was not able to tighten its interest payments as much as proposed, but still cut the rate to 200bp, according to another source. The loan was issued at a discount of 99.75 cents but was quoted at 99.125-99.5 on Wednesday, the first source said.

The 175bp coupon that American Airlines now pays is a hard fit for the largest buyer base in the loan market, Collateralized Loan Obligations (CLOs), which are challenged to pay their own investors when they receive lower interest payments.

“The [Libor] plus 175 credits are not naturally a great fit for CLOs; that is the real tight end of the range for leveraged loans,” said Mark Pelletier, head of the leveraged finance group at Ryan Labs Asset Management. “With any type of risk sentiment, the market tries to push back on credits trying to reprice.”

Leveraged loans pay investors a set coupon plus Libor, so as rates rise, so do payments, making it an attractive investment when more rate hikes are expected.

The demand has pushed US CLO issuance to about US$53bn this year, up 41% from the same period in 2017, and has led to US$9.5bn of inflows into loan mutual funds through May 23, according to Thomson Reuters LPC Collateral and Lipper data.


The pushback comes amid increased global market volatility. The euro tanked to a 10-month low this week, as short-term Italian bond yields on Tuesday suffered the biggest one-day jump since 1992, Reuters reported, as concerns about Italy’s political crisis and a trade war sent shockwaves through markets. The US on Thursday said it was moving ahead with tariffs on aluminium and steel imports from Canada, Mexico and the European Union.

The SMi100, an index that tracks the 100 most widely held loans, dropped slightly this month to 98.4 on May 30 from 98.6 on May 1.

Repricings have not just challenged trading levels, some proposals didn’t even make it through the market. Gaming and entertainment property owner VICI Properties and automotive supplies producer American Axle & Manufacturing both pulled repricings in May.

“Spreads have tightened quite a bit so at some point investors are going to push back,” said Kimberly Flynn, a managing director at XA Investments. “The median and longer-term trends are that you have a lot of hungry buyers of loans. It might be more of a short-term adjustment as opposed to something fundamental.”

Spokespeople for American Axle, American Airlines and Avolon did not immediately return calls seeking comment. A VICI spokesperson declined to comment.

The pushback has not extended to the entire loan market as managers are eager to put their new money to work, with some firms selling their repriced loans to make way for new, better-priced credits. The forward calendar hit US$76.1bn in May, the highest level since last July, according to LPC data.

Financial technology company Blackhawk Network Holdings tightened pricing on a $1.35 billion first-lien term loan backing its buyout by private equity firms Silver Lake Partners and P2 Capital Partners, cutting the interest rate to 300bp from guidance of 325bp-350bp, according to a source.

“There is a view that demand is going to stay strong in 2018 and that the asset class is appealing in a rising-rate environment, and across the board from Moody’s [Investors Service] to the sellside, we all see growth this year,” said Chris Padgett, head of leveraged finance at Moody’s.

(Reporting by Kristen Haunss, Jonathan Schwarzberg and Yun Li; Editing by Michelle Sierra and Lynn Adler)

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