LPC: Weak secondary market could rein in refinancing wave

By Lisa Lee
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.
DRIVEN BY REPAYMENTS
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.