Once struggling loans return on red-hot demand

[February 25, 2017]  NEW YORK (Reuters) - Web conferencing provider Premiere Global Services (PGi) is considering a return to the loan market to reprice its debt and even add a little more to pay a dividend after struggling to sell the same buyout-related debt last year, illustrating growing demand for US leveraged loans.

Soaring demand for floating-rate debt has already seen a wave of repricing and refinancing activity, and are now returning with deals that floundered during a period of volatility that started in the second half of 2015.

In May 2016, Barclays struggled to sell a US$550m loan backing PGi’s buyout by Siris Capital and sold at a discount of 90 cents on the dollar. At the time, investors had questions about the cost savings that would stem from the buyout and a predicted decline of the business.

However, the company was able to make improvements, cutting costs faster than expected and the predicted decline in business was not as steep as feared. The US$550m term loan is now trading near 99, allowing lenders to start discussions on repricing or refinancing the deal.

“If you can tell a good story right now, you can really benefit,” a source close to the deal said. “It’s a combination of being able to achieve economic goals and a strong market.”

A decision to bring the PGi deal back to the market would come on the back of the successful return of several other deals that once stumbled in the leveraged loan market.

DIVIDEND ADDED

One such loan came from Vectra, formerly known as OM Group. Banks funded the company’s buyout by private equity firm Apollo Global Management in October 2015 after investors balked at buying the debt. The market faced extreme volatility at that time stemming from low oil prices and concerns about China’s economy.

Lead bank Credit Suisse finally sold the US$450m loan in May 2016 at a discount of 90 and a price of 600bp over Libor.

Vectra was able to lower pricing on the loan to 500bp over Libor when it returned to the market earlier this month. In addition, the sponsor was able to take out a dividend, as the size of the loan was increased to US$475m from US$425m during syndication.

The book for the deal was oversubscribed by about three times, said a source familiar with the transaction. Investors were eager to buy the debt after Apollo delivered on projected cost savings and garnered additional savings. The company also sold part of the business at a multiple of nine times Ebitda, which helped increase the company’s value.

In another example, last month video conferencing equipment maker Polycom was able to lower pricing on the US$750m term loan that it arranged in September 2016 to back its buyout by Siris Capital.

A man wears U.S. dollar sign rings in a jewellery shop in Manhattan in New York City November 6, 2014. REUTERS/Mike Segar

The interest rate dropped all the way to 525bp over Libor from 650bp over Libor and the loan was originally sold at a discount of 96 cents on the dollar in September.

Investors appreciated the fact that the company was achieving cost savings ahead of schedule and paying down debt early, said a source familiar with the deal.

M&A LULL

These opportunities have arisen due to a lack of new M&A financing deals and unwavering demand from retail investors. Loan funds have seen 15 straight weeks of inflow, with the four-week moving average standing at US$893.8m, according to Lipper.

“A year ago, leveraged loan indices showed a total year-to-date return of negative 1.5%, a figure that is in stark contrast with the current return of positive 0.75%,” said a senior banker. “This is a tremendous sentiment swing. Demand for the loan product is elevating market liquidity, and this liquidity is forcing the hand of portfolio managers to stay invested.”

That means even some of the toughest names are trading above par and have become candidates for repricing or refinancing, including the debt backing Veritas Software’s US$7.4bn buyout by Carlyle Group.

Banks funded a US$4.6bn loan-and-bond financing package in January 2016 after investors refused to buy the debt at the proposed terms. The deal included a three-tranche US$2.8bn loan deal that sold at 85 in June 2016. The loans are now all trading above par, according to data from Thomson Reuters LPC.

“There aren’t too many names that aren’t repricing candidates if they’ve remotely performed,” said another senior banker. “Money is pouring into the loan class from every possible source. Anything with a decent story and a bit of coupon is being snapped up.”

(Additional reporting by Lynn Adler)

(Reporting by Jonathan Schwarzberg; Editing By Michelle Sierra and Chris Mangham)

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