By Andrew Berlin
NEW YORK, Oct 4 (Reuters) - Fixed satellite services operator Telesat Canada is the second company to withdraw an opportunistic repricing from the U.S. leveraged loan market after running into resistance from investors, which also prompted auto-parts maker Allison Transmission to abandon a similar repricing attempt in September.
Higher quality leveraged loan issuers have been seeking to cut spreads to as low as 175bp over Libor, but investors are starting to draw a line in a bid to stop the downward spiral in pricing.
The investor push back parallels an episode in June, when opposition from lenders forced Berry Plastics and Virgin Media to abandon efforts to reprice loans in the 200bp-250bp range.
The resistance comes as the market remains constrained by supply and volume is dominated by a disproportionate amount of refinancing and repricing activity relative to new money deals.
"Pulled repricings are the first sign of the market slowing down," a senior leveraged finance banker said. "But we're not at that point yet. Not enough deals have failed."
The pulled repricings better reflect limitations of certain investment vehicles, such as Collateralized Loan Obligations (CLOs), and inferior relative value, rather than waning demand, sources said.
Telesat asked to cut pricing on its US$2.4bn term loan due in 2023 to 225bp over Libor with a 75bp floor. The debt currently pays 300bp over Libor with a 75bp floor, after a repricing in January, according to Thomson Reuters data.
"Nobody cared at that level," an investor said. "Nobody wanted a B1-rated issuer at 225bp."
Telesat Canada is rated BB-/B1. The facility is rated BB-/Ba3.
"The Telesat exercise would have priced it well inside its comps," another investor said. "The BofA BB cable/satellite loan index yield was around 4.25% at the time. Telesat was looking to price 60bps inside that."
Allison Transmission pushed to cut the coupon on its US$1.2bn term loan B due in September 2022 to 175bp over Libor with a 0% floor, from 200bp over Libor with a 0% floor. The spread reduction was proposed in conjunction with a US$200m pay down on the loan.
Allison is higher rated at BB/Ba2 corporate and BB+/Ba1 secured.
"200bp is a red line on spread [at that rating]," the investor said. "If Allison had gotten done, it would have led to more issuers trying to do the same."
"At those levels, it stops being accretive to CLOs," another investor said. CLOs seek to capture the arbitrage between the interest received on underlying loans and the interest paid on debt that funds them. The arbitrage evaporates the tighter pricing at each rating level goes.
"The market is still quite hot, but it's hard to price much lower considering the cost of outstanding CLO liabilities won't support deals going materially below 200bp spread," the second investor said.
In 3Q17, spreads on first-lien term loans averaged 2.63% for double-B rated issuers and 4% for single-B rated issuers, according to Thomson Reuters LPC.
US provider of semiconductor chemicals Versum Materials Inc is seeking to reprice its US$571m term loan due in 2023.
Pricing on the deal is guided at 200bp over Libor with a 25bp leverage-based step-down and 0% floor. The loan currently pays 250bp over Libor with a 75bp floor.
Versum is rated BB/Ba2 while the loan is rated BB+/Ba1.
"A step down is different, unless it's imminent," a debt capital markets head said.
In May, pet food maker Blue Buffalo placed a US$400m term loan to refinance existing debt with a spread at 200bp over Libor, with a 25bp step-down tied to leverage and ratings upgrades, and a 0% floor. The company tried for even tighter pricing but lenders resisted, sources said at the time.
The company is rated BB-/Ba2 and the loan is rated BB+/Ba2. SHORT-DATED BENEFIT
Despite the clear message from investors on pricing, some credits have been able to lower pricing further due to their structure.
US power producer Calpine Energy in January refinanced into a three-year loan that pays 175bp over Libor with a 0% floor.
The company is rated B+/Ba3, while the loan is rated BB/Ba2.
"[Rolling into the new deal] was better than being repaid for CLOs that couldn't extend maturities," the second investor said, referring to the weighted average life tests on underlying loans CLOs are subject to ensure deals are repaid by a certain date.
Compliance with the test would have presented a challenge if funds were on the hook to find a replacement, given leveraged loans typically have maturities of six to seven years.
Similarly, Computer giant Dell in September successfully repriced its pro rata term loans to 150bp over Libor and 175bp over Libor with a 0% floor. The loans mature in 2018 and 2021.
Dell is rated BB+/Ba1, while the loans are investment-grade rated at BBB-/Baa3.
"Telesat is a 2023 maturity, so it doesn't offer the attractive short term maturity," the second investor added.
Meanwhile, US cruise ship operator Norwegian Cruise Line (NCL) has been marketing a four-year US$375m term loan to refinance its unsecured notes due in 2020.
Price talk opened in the 200bp-225bp over Libor range with a 0% floor and 99.75 original issue discount, but has been revised to 175bp over Libor with the same floor and discount.
NCL is currently rated BB/Ba2 while its secured debt is split-rated at BBB-/Ba2.
"People like short duration," an investor said.