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Issuer friendly changes at highest level for a year

Published 05/06/2016, 09:43 AM
Updated 05/06/2016, 09:50 AM
Issuer friendly changes at highest level for a year
SPGI
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By Jonathan Schwarzberg

NEW YORK (Reuters) - Companies are increasing the size of loan offerings and cutting pricing at rates not seen for a year as investors are eager to snap up the high-quality deals that have been coming to market over the last month.

Industry insiders said this could pave the way for new supply from issuers with strong credit histories and refinancing deals or even repricing of deals that priced during the fourth quarter when the loan market became volatile as investors were spooked by low oil prices, the Chinese economy and earnings in the U.S.

At the time, prices on the primary market took a dramatic turn higher, leading to more than a half dozen deals remaining on bank books.

Since the volatility hit, issuance has slumped, leaving investors with plenty of cash to spend. They are willing to lend to deals with strong credit profiles, even if they are forced to cut prices to receive allocations to the oversubscribed deals.

“For high-quality companies and highly rated companies you are seeing investors trying to get paper -- there just hasn’t been a lot of paper on the market,” said one investor. “On those deals, there is very limited buyer power in terms or pricing.”

These issuer-friendly conditions allowed companies to upsize 10 deals, a number that has not been seen since there were 12 positive structural changes in April 2015.

On the pricing side, issuers cut the proposed interest rate from initial guidance on 22 institutional loans, a pace also not seen since April 2015 when there were 27 downward price flexes.

PRICE CUTS

Late last month, chemicals specialist PQ Corp cut pricing twice to 475bp from the 550bp spread that was originally offered on a US$900m term loan and a US$300m-equivalent euro-denominated term loan backing its acquisition of sulfuric acid company Eco Services.

In another recent instance, McGraw-Hill (NYSE:SPGI) Global Education increased the size of its US$1.305bn term loan to US$1.575bn and cut the spread to 400bp from 475bp. The loan backs a dividend and refinancing in addition to merging McGraw Hill School Education into the main company.

These deals come as the secondary market has made a dramatic turnaround. The SMi100, which reflects pricing on the largest leveraged loans, had risen to 98.19 on Wednesday, up from the low of 95.3 on February 23. The SMi100 last traded in this area at the start of November.

The strong secondary market and the drop in primary pricing means that companies are looking again at refinancing debt or even repricing some of the deals that were done at the end of last year, said a lawyer who works mainly with private equity firms.

The lawyer said he has started to see inquiries about repricing and that in some cases issuers could even consider paying the 1% premium to reprice deals that have not seen call protection roll off yet if the math works.

“It just comes down to whether or not they want to assure themselves lower pricing now because they are worried volatility could return,” the lawyer said.

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