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 Overall volume still fell short of last year’s second quarter,
however, constrained by regulatory parameters on high-risk lending
and by corporations favoring cash and equity over debt to fund
takeovers.
Companies borrowed $517.4 billion in the syndicated loan market in
the second quarter, 37 percent more than the first quarter, but 13
percent less than the second quarter of last year, according to
Thomson Reuters LPC.
The loan issuance figures are based on deals completed. Financings
for the wave of mergers and acquisitions announced over the past
three months could boost volume later this year.
Total completed M&A loan financings sank to $80 billion in the
second quarter from about $106 billion in the first quarter and
$117.7 billion a year earlier.
The second quarter was characterized by a modest excess of demand
over supply, with relatively light new money issuance this year,
investors and bankers said.
“There’s been little in the way of traditional LBO (leveraged
buyout) activity, and what little there has been in the way of new
money new issuance has been corporate to corporate activity,” said
John Fraser, managing partner of 3i Debt Management US.
“M&A activity is approaching record levels, exceeding the 2007 pace,
so there are lots of deals happening but unfortunately they are at
price points where most of the private equity sponsor community
really can’t compete,” he added.
Leveraged loan refinancings shot up 140 percent to $151.7 billion in
the second quarter from the first quarter’s $63.1 billion, which was
the lowest since the end of 2011, and also surpassed $148.3 billion
in the second quarter of last year.
Greece’s financial turmoil and the prospect of at least one Federal
Reserve rate hike before year-end kept U.S. interest rates
relatively low, compelling companies to finance transactions before
borrowing gets more expensive and to reduce costs on existing deals.
Companies including discount chain Dollar Tree Inc and pet retailer
PetSmart Inc returned to the market to slice yield spreads within
months of closing on their massive M&A loans.
“Better quality issuers are still able to reprice loans and do it
relatively easily,” said Fraser.
PIPELINE FILLING
On the investment grade front, borrowing of $188.9 billion rose
slightly from $177.8 billion in the first quarter but was below
$254.8 billion in last year’s second quarter.
Low-rated companies tapped the leveraged loan market for $233.3
billion in the second quarter, up sharply from $138 billion in the
previous three months, though below $260 billion a year earlier.
“Overall, regardless of headlines, it seems to be a borrower
friendly market,” said Patrick Pedonti, chief financial officer at
SS&C Technologies.
SS&C, now in the market to fund its $2.7 billion acquisition of
Advent Software Inc, issued leveraged loans in 2012 to back its
GlobeOp acquisition and has since refinanced that debt twice.
“Other than some rough periods here and there, it’s been a fairly
good market for corporations,” Pedonti said.
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The pipeline for second-half deals is filling with some of the
largest post-crisis deals, including loans to back Avago
Technologies Ltd’s $37 billion acquisition of BroadCom Corp, the
largest merger of chipmakers, and Charter Communications Inc’s $56
billion purchase of Time Warner Cable Inc and $10.4 billion takeover
of Bright House Networks LLC.
Investors will make room in their portfolios and be willing to
significantly overweight these types of borrowers, if loans price
fairly, Fraser said.
“It’s really going to take a broader amount of new issuance to put
any pressure on the market, to end the wave of repricings and get
the supply and demand equation back closer to balance,” he added.
Repricing could wane in the second half of this year, especially as
all of the newly announced M&A deals come to market, a banker said.
While leveraged M&A-related lending was flat at $59 billion in
completed deals in 2Q15, recent announcements helped boost the
overall institutional forward calendar to a 28-month high of $82
billion, a figure only reached once post-crisis.
RISK MEASURED
Leverage for large buyouts announced in the second quarter hovered
near two-year lows, suggesting banks adhered more closely to
leveraged lending guidelines that U.S. regulators finalized in March
2013 to avert systemic risk.
Total leverage averaged 6.01 times earnings before interest, tax,
depreciation and amortization (Ebitda), up marginally from a
two-year low of 5.99 in the first quarter, according to Thomson
Reuters LPC.
The ratio had been as high as 7.4 times in the second quarter of
2007 before the financial crisis.
On the buy side, retail started more consistently returning to bank
loan mutual funds during the second quarter while collateralized
loan obligation (CLO) formation surpassed estimates.
“CLO buyers continue to be out in force and retail buying for
leveraged loans is starting to pick back up as we get closer to the
Fed hiking,” said Michael Contopoulos, head of U.S. high yield
credit strategy at Bank of America Merrill Lynch.
“There’s strong demand for the leveraged loan asset class from
structured vehicles as well as retail, and that’s in the context of
significantly lower issuance,” he said.
(Reporting by Lynn Adler; Editing by Leela Parker Deo)
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