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Banks test sluggish US loan market with a slew of M&A transactions

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By Aaron Weinman

NEW YORK, May 20 (LPC) - Banks in the US have launched US$3.4bn in leveraged loans backing mergers and acquisitions this month, reopening a market that was mainly available for companies seeking emergency funding related to the coronavirus pandemic.

Four term loans are scheduled to price before the end of this month, and banks are offering investors juicy coupons and steep original issue discounts (OIDs) to sell the debt.

"We're beginning to see the term loan market open and see some of this service (mergers and acquisitions) M&A," said Peter Toal, the global co-head of fixed-income syndicate at Barclays. "The M&A-related transactions are primarily for transactions that had already been underwritten before the downturn."

Talent management company Cornerstone OnDemand is raising roughly US$1bn to support its acquisition of Saba Software. Technology firm Xperi is in the market with a US$1.1bn loan backing its merger with peer TiVo Corp, banking sources said. Energy company Apergy also launched a US$537m loan supporting its merger with Ecolab's upstream business Nalco Champion. And sources said that broadband infrastructure operator Ziply Fiber expects to price a US$791m loan to fund its acquisition by a group of investors led by Searchlight Capital Partners as early as Wednesday.

Bank of America is arranging the loans for Apergy, Ziply Fiber and Xperi. Morgan Stanley is lead arranger on the deal for Cornerstone, the sources said.

Spokespersons for both banks declined to comment. Spokespersons for Cornerstone and Xperi also declined to comment, and a spokesperson for Apergy referred to the company's media release. A spokesperson for Ecolab said it expects to complete the merger by the end of the second quarter. Spokespersons for Saba, TiVo and Searchlight were not immediately available for comment.

The new loans are paving the way for more acquisition financing, which stalled after the coronavirus shuttered business operations and brought the global economy to the brink of a recession.

Market participants expect the loans to serve as a litmus test for future transactions.

"One of the best signs right now is that there is financing available for just about any company, given the right tenor, price and collateral package," said Tim Fischer, head of US leveraged finance sales at MUFG.


Cornerstone's US$1bn loan, rated B1 by Moody's Investors Service and B by S&P Global Ratings, is being shopped at 425bp over Libor and an OID between 95-96 cents on the dollar, according to bankers. Xperi's Ba3/BB- rated loan offers 400bp at a discount of 96 cents, and Apergy's Ba2/BBB- rated US$537m transaction is paying 500bp at a discount of 90-92 cents.

These Double B rated loans are being offered at roughly 200bp more than similarly rated loans syndicated a few months ago to compensate investors that are committing to new loans while uncertainty from the pandemic persists. At the end of January, the average margin for a drawn term loan rated Double B was just 225bp over Libor, according to data from Refinitiv LPC.

Adding to the uncertainty is the ratings-driven pressure on Collateralized Loan Obligations (CLOs), which purchase more than half of new broadly syndicated leveraged loans.

As the pandemic has decimated company earnings, CLOs have tended to a rush of ratings downgrades to loans they already hold. Approximately 70% of US CLOs are failing their Weighted Average Rating Factor (WARF) test, a factor determining the credit quality of the CLO portfolio, according to a May 15 report from Bank of America.

CLOs are wary of adding more lower-rated, Single B loans to their portfolios as the credits risk downgrades into Triple C territory, just a few notches above default.

And while the high-yield bond market continues to issue new transactions, the US leveraged loan market will be slower to take off as loan investors prefer deals with higher credit ratings and lender-friendly margins. In fact, year-to-date, high-yield bond issuance has swelled to US$138bn, 38% higher than the US$99.8bn raised at the same point last year, according to Refinitiv data.

"Double B rated credit for the CLO world is like manna from heaven," said Frank Ossino, a senior portfolio manager at Newfleet Asset Management. "Anything that can improve a CLO's WARF test will blow out in the new-issue market right now." (Reporting by Aaron Weinman. Editing by Michelle Sierra and Kristen Haunss.)