U.S. Markets closed

Must-know leveraged loan update: Issuance increased last week

Chanderlekha Nayar

Interesting week for high yield bonds, leveraged loans see little activity (Part 5 of 7)

(Continued from Part 4)

Activity at the primary loan market remained nearly busy as opportunistic issuers kept coming to test the investor’s interest for floating interest rate loans. The benefit with the leveraged loans (BKLN) is that the interest paid in this asset class can be adjusted as per the prevailing market interest rate. Many investors prefer leveraged loans over the high yield bonds (JNK) when interest rates are rising or expected to rise. However, when interest rates decline, investors can suffer due to low returns in the leveraged loan market. As seen from the chart below, the issuance in the leveraged loans have increased last week in line with the rise in the U.S. ten-year Treasury yield, which ended the week at 14 basis point higher.

Market flex favored issuers

We have been noticing investor’s disappointment in the leveraged loan (SNLN) pricing terms, which remained quite aggressive in the past few weeks. In fact, last week the market flex activity mostly remained issuer-friendly. Market flex has been one of the best ways to gauge the price negotiations in the leveraged loan market. The leveraged loans normally pay a floating interest rate above LIBOR
+125 basis point or 150 basis points.

The pricing on the leveraged loan like any other fixed income is dependent on upon macro economic and political conditions. At the end of the process, the bankers (book runners) tally the commitments made by investor at different yields and decide as to what price the loan should be issued. If the loan is oversubscribed, then the issuer will squeeze the credit spread, which represents more issuer friendly market. However, if the demand remained less, then the issuer will have to increase the price. That would be an investor friendly market, as issuers have to raise the credit spread to entice the investments. Credit spread is the risk premium investor demand over and above the risk free assets.

Average new-issue yields fell last week. Single-B yields fell to 4.90%, from 4.98% a week ago, while BB inched down to 3.53%, from 3.55%. Total issuance edged up to $26 billion – $12 billion higher from the previous week’s $14 billion issuance. The year-to-date issuance was $1.6 trillion- $200million lower than $1.8 trillion over the same period in 2013.

Rite Aid versus RadNet refinancing deals

Of the 19 deals that clicked last week, nearly 14 new loans issued were to refinance the existing debt. One of the major names that tapped the market is Rite Aid Corporation (RAD), who issued a $1.15 billion refinancing first-lien term loan. Rite Aid Corporation (RAD) is retail drugstore chain in the U.S.

Rite Aid (RAD) reported the same-store sales data for the 52 weeks ended March 1, 2014, which increased 0.5 % with sales of $25.4 billion compared to $25.2 billion for the same period last year. Prescription sales represented 67.9% of total drugstore sales, and third party prescription sales represented 97.0% of pharmacy sales. Given the company’s recent upswing in the operational profitability reported in the fiscal year ended 2014 results, the company is expected to receive a good reception in the secondary market. Credit outlook remained stable for the company as Moody’s Investors Service recently upgraded the Rite Aid’s corporate family rating to B2 from B3.

Another healthcare company that was in the market last week was RadNet, Inc. (RDNT). RadNet, Inc. provides outpatient diagnostic imaging services in the U.S. The company issued a refinancing loan worth $200 million due for 2018.

The highest issuance was from the Spanish multinational pharmaceutical and chemical company, Grifols, S.A (GRFS), who tapped the market for $3.2 billion refinancing loan.

Continue to Part 6

Browse this series on Market Realist: