Why recent primary market trends are evident in leveraged loans
Must-know: Corporate bond trends in the week ending August 15 (Part 8 of 9)
Recent primary market trends are evident in leveraged loans
Leveraged loans (BKLN) issuance increased a staggering 141% to $21.2 billion over 16 deals in the week ending August 15. Issuance was helped along by some mega-deals. The deals were completed during the week. This was in sharp contrast to the primary market in high-yield debt (HYG) (JNK). It saw issuance slump.
Leveraged loans pay a floating rate of interest. This implies that investors are compensated at prevailing yield levels. This reduces their risk to adverse interest rate movements. However, issuers must pay interest at higher rates. Some issues were called off or postponed for this reason.
Issuers take advantage of yields to fund acquisitions and refinance
Acquisition-related financing deals dominated. They accounted for seven of the 16 offerings. There were also six refinancing transactions in the week. Despite the recent rise in yields, interest rate levels are still comparatively low. It still made sense for many borrowers to take advantage of the low yields and spreads prevailing in the market. They were able to refinance costlier debt that was issued earlier.
Mega-deals of the week
Historically, low yields have been associated with higher mergers and acquisitions activity. The week saw some mega-offerings. Multi-store grocer, Albertsons, closed its two-tranche, $4.6 billion deal to acquire stores from Safeway.
Telecom and cable major, Charter Communications (CHTR), completed its $3.5 billion offering. CHTR plans to use the proceeds to partially finance its acquisition of Time Warner Cable’s subscribers. The issue was downsized from $7.4 billion due to unfavorable market conditions. CHTR still needs $3.9 billion to complete its acquisition. It will likely return to the debt markets for the funding shortfall.
Major refinancing-related deals included those of Travelport, at~$2.4 billion, and Expro Oilfield Services, at $1.55 billion.
There were two funding deals related to leveraged buyouts. Consumer packaged goods company, Acosta Sales & Marketing, came up with a two-tranche, $2.3 billion offering. The offering would partially finance the company’s leveraged buyout by private equity player, The Carlyle Group (CG).
In the next section, you’ll read an analysis of secondary market trends in the leveraged loans market.
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