By Tessa Walsh
LONDON, July 24 (LPC) - A group of European leveraged loans that were completed earlier this year are trading below their issue price after a surge in supply in May and June helped investors to secure higher primary loan pricing from deals with stronger documentation.
The primary market is now pricing deals 50bp-75bp higher and making concessions on aggressive documents to attract increasingly selective investors.
Deals that have been launched in the last two weeks at 350bp-400bp are now getting done at 375bp-450bp, depending on investors' view of the credits.
The powerful combination of a wider choice of better priced deals, cash to invest and the ability to say no is making new primary deals look more attractive than secondary for investors.
“Why wouldn't you sell paper at 325bp and a discount of 99.5 to buy paper at 425bp with a similar discount? If you can add a new credit and boost your spread, why not?” a senior loan investor said.
Around 24 of the 80 leveraged loans completed in 2018 so far are quoted below 99, which is generally still within banks' underwriting fees of 1.5%-2%.
Of the deals completed this year, 64.56% are quoted at 99-100, 22.78% are at 98-99 and 1.27% are below 97, according to Thomson Reuters LPC data.
Five deals, including a £700m sterling tranche and €475m-equivalent Polish zloty tranche of the €3.3bn financing backing KKR's buyout of Flora Food Group, are quoted below 98, which is painful for lenders and investors.
Two February deals, including a €2.285bn deal for Dutch discount retailer Action Nederland and a US$504m deal for Swedish trading technology provider Itiviti Group, are also in this category, along with a €920m loan for Spanish sports group Imagina Media Audiovisual in June.
Another February deal, a €310m leveraged loan backing UK flower and vegetable supplier Flamingo's merger with Afriflora, is quoted at 91.88, after pricing at 575bp over Euribor with a 0% floor and a discount of 93 via lead banks Credit Suisse (SIX:CSGN), Investec and Jefferies.
TROUBLE AHEAD?
While the rise in supply has helped to rebalance the market, which has been skewed in favour of private equity firms for most of the last two years, low secondary prices are also creating potential problems for deals that investors view as aggressive.
This includes deals that were agreed earlier this year but have yet to be syndicated, such as the US$13.5bn loan and bond financing backing Blackstone (NYSE:BX)'s acquisition of a 55% stake in Thomson Reuters' TRI.TO F&R business, which owns LPC and IFR.
The deal will be formally launched when the acquisition closes, which is expected in September or October.
“It's tough because it's a very big deal. I definitely bet that it will either come with a discount below par or trade there. I just think it will struggle now due to its size – it's such an aggressive deal and very leveraged, and has significant Ebitda adjustments,” a leading US institutional investor said.
In a further cautionary tale, a €622m equivalent deal for Norwegian satellite navigation group Marlink was pulled last week. The term loans were offered at 425bp-450bp over Euribor/Libor with a 0% floor and 99.5 discount by JP Morgan alongside BNP Paribas (PA:BNPP), Credit Agricole (PA:CAGR), DNB and HSBC.
Unusually, the opportunistic dividend recapitalisation and refinancing deal was not underwritten and was being sold on a best efforts basis. But the banks did not find enough appetite from investors despite several attempts to adjust pricing.
Investors said that France-based sponsor Apax had been too aggressive about trying to remove equity when there is uncertainty in Marlink's underlying business due to increased competition.
“This was best efforts, maybe that's why they pushed it too far – they weren't on the hook for it, but it didn't fly,” a third investor said.
Investors are viewing the market as more constructive, however, and generally like low secondary prices which offer interesting relative value dynamics between the primary and secondary markets.
The current repricing is being compared to a similar adjustment in 2016 after oil prices slumped.
“It's good. It just means there's more choice of primary, or secondary at lower levels. It's a good thing and a healthy development,” a fourth investor said.
This adjustment is also being cited as evidence of a more mature market, as investors continue to focus on credit and push banks and private equity firms for more concessions to better reflect risk, which could lead to a nervous autumn for arrangers.
“It depends how aggressive the banks got with flex economics and how sensible the sponsors are on a proper document. If banks loose economics because they've been too aggressive on what they've underwritten that's OK – I'm not going to lose sleep about it.” the first investor said.
(Editing by Christopher Mangham and Matthew Davies)