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Why leveraged loans issuers are compelled to reassess deals

Phalguni Soni

High-yield debt funds see record outflows and bonds rally (Part 5 of 7)

(Continued from Part 4)

Leveraged loans issuuers in the primary market for the week ending August 8

Leveraged loan issuance (BKLN) dipped by over 53% week-over-week to ~$8.8 billion in the week ending August 8. The number of transactions was also lower at 15, compared to 25 in the previous week. Market conditions for lower-rated issuers were worse compared to June and early July, as yields and spreads were comparatively higher.

Besides, as explained earlier, overseas and domestic credit risks and geopolitical risks took their toll on U.S. bond and stock (SPY) markets. Despite adverse sentiment, a few high-profile transactions came to market last week.

Deal updates

Due to the adverse market environment, deals were either being priced more unfavorably or being withdrawn altogether from the market. Charter Communications (CHTR) was forced to revise its two-tranche offering from $7.4 billion to a $3.5 billion term loan. CHTR is seeking funding for purchase of assets from media and tech giant Comcast (CMCSA).

Cerberus Capital Management-controlled Albertsons proposed $4.6 billion financing deal also underwent revisions. Pricing for the deal was higher, for both the five-year amortizing term loan as well as the seven-year term loan. The company is planning to use the proceeds for its $9 billion merger with grocer, Safeway (SWY).

Issuer rationale

Refinancing deals, financing for leveraged buyouts and acquisitions, repricing transactions, and payment of dividends or recapitalization, were some of the dominant reasons why issuers took recourse to the leveraged loans market last week.

Refinancing transactions

There were five refinancing transactions in the week ending August 8 as borrowers looked to take advantage of the comparatively low yields and spreads environment prevailing in the market and pay off older debt.

Major refinancing transactions included those by BWAY Holdings and United Continental Holdings. BWAY is one of America’s leading manufacturers of plastic and metal containers. The company issued $1.22 billion through a cov-lite term loan with a six-year tenor. The company plans to use the proceeds to pay off existing debt and pay a dividend to Platinum Equity.

Leading carrier, United Continental issued $500 million through a term loan with a seven-year tenor.

Leveraged buyout related issuance

There were four leveraged buyout (or LBO) related deals last week. These included issues by National Veterinary Associates at $575 million, packaging company Goodpack at $800 million, and media company Endemol.

What are leveraged loans?

Leveraged loans are issued by companies rated below investment grade. A leveraged loan is a commercial loan provided by a group of lenders. Typically secured, the loan is structured, arranged, and administered by investment and commercial banks, the arrangers—for example, JPMorgan. It’s then syndicated to other banks or institutional investors. The interest rate on leveraged loans is floating rate and paid as a spread over an interest rate benchmark, such as LIBOR. Interest rates on leveraged loans are usually paid at or above LIBOR + 1.25%.

JPMorgan is part of the S&P 500 Index (SPY) which includes other investment and commercial banks like Citigroup and Wells Fargo.

In the next section, we’ll analyze other primary and secondary market trends in the leveraged loans market. Please continue reading the next section in this series.

Continue to Part 6

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