By Kristen Haunss
NEW YORK, Jan 13 (Reuters) - At least one large investor has
requested that the loan backing the buyout of Petco Animal
Supplies IPO-PTAS.N be issued without a feature that had
previously helped boost spreads but now threatens returns to
some Collateralized Loan Obligation (CLO) investors.
Other firms considering investing in the US$2.5bn loan for
the pet retailer have also asked Citigroup (N:C), one of the banks
arranging the financing for private equity firms CVC Capital
Partners and the Canada Pension Plan Investment Board (CPPIB),
to eliminate the Libor floor on the loan, sources said.
Libor floors are added to credits to protect investors in
lower interest rate environments by setting a limit on the
benchmark and guaranteeing a spread minimum. However, some
investors say such protection has run its course after boosting
returns by about 7% in the riskiest portions of CLOs.
CLOs, the biggest buyers of leveraged loans, have benefited
from this feature since the credit crisis when Libor floors
helped boost yields after three-month Libor fell from a 10-year
high of 5.72% in September 2007 to below 1% in May 2009.
Three-month Libor, the benchmark loans spreads are based on,
rose 91% to 62bp Wednesday from 32.4bp on October 1.
It is unclear if Petco's banks will create a tranche that
does not include a floor but may consider the option if it
attracted additional investors to the deal, a source said.
Banks are contemplating issuing at least one other loan
without a floor this week, a source said.
A Citigroup spokesperson declined to comment. A Petco
spokesperson did not immediately return a telephone call seeking
comment.
Ninety-eight percent of first-lien term loans issued in 2015
until the end of November included Libor floors, typically of 1%
or 0.75%, according to Thomson Reuters LPC.
(Editing By Michelle Sierra and Jon Methven)