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Leveraged-Loan Investors Demand Higher Yields as U.S. Recovery May Falter
Investors are demanding the highest yields in more than a month to buy leveraged loans amid concern that a recovery in the world’s largest economy may falter.
The average spread to maturity over the three-month London interbank offered rate for the most actively traded leveraged loans climbed to 4.53 percentage points as of Aug. 25 from 4.36 percentage points on July 29, according to Standard & Poor’s Leveraged Commentary & Data.
Evertec Inc., the processing unit of bank holding company Popular Inc. that Apollo Management LP is buying, this week joined issuers raising pricing on loans to complete transactions as business investments in the U.S. declined and new home sales fell to the lowest level on record. Borrowing costs are rising as issuers seek money for takeovers and to refinance $346.3 billion of loans maturing through 2014.
“The buy-side will continue to have a fair amount of negotiating leverage, primarily because of the new-issue loan pipeline,” said Don Young, a portfolio manager at Octagon Credit Investors LLC, which manages more than $4 billion of high-yield debt, including $3.9 billion in leveraged loans. “Spreads should remain wide because of the new supply that’s going to come out after Labor Day,” which is Sept. 6.
Company borrowing costs had tightened through July to reach the lowest level since mid-May, according to S&P’s LCD, as the European debt crisis abated, President Barack Obama signed the most sweeping financial regulation bill since the Great Depression and economic indicators in the U.S. picked up.
‘Macro Concerns’
The extra yield, or risk premium, that loan investors charge to speculative-grade companies increased as capital spending by businesses reversed two months of gains to decline by 8 percent, the biggest drop since January 2009, the Commerce Department said this week.
Meanwhile, purchases of new homes fell 12 percent from June to an annual pace of 276,000, the weakest since data began in 1963, according to the Commerce Department.
“Macro concerns might cause investors to demand higher yields,” said Darin Schmalz, director of leveraged finance at Fitch Ratings in Chicago.
Evertec increased pricing on $400 million of loans for its acquisition by funds affiliated with New York-based Apollo, bringing the number of issuers that boosted yields to complete transactions in August to at least four, according to data compiled by Bloomberg.
The processing unit of Hato Rey, Puerto Rico-based Popular increased the interest rate for a $50 million revolving credit line due in five years and a $350 million term loan by 0.5 percentage point to 5.25 percentage points more than Libor, the rate banks charge to lend to each other.
Higher Libor Floor
Evertec’s six-year term loan also has a Libor floor that was boosted by 0.25 percentage point to 1.75 percent. The lending benchmark has declined to 0.297 percent as of today from a 13-month high of 0.539 percent on June 17.
Both debt will be sold at 97 cents on the dollar, wider than the previously proposed 2 percent discount, which reduces proceeds for the company and boosts the yield for investors.
Last week, Wyle Laboratories Inc., an aerospace engineering and information-technology services company owned by Court Square Capital Partners, increased the interest rate for a $195 million term loan it’s seeking to buy CAS Inc. by 0.75 percentage point.
Clopay Ames True Temper Holding Corp., a maker of specialty plastics, garage doors and gardening tools, increased the interest rate on a $500 million term loan it’s seeking to help finance an acquisition by as much as 1.5 percentage points.
Leveraged-Loan Pipeline
Banks agreed to arrange an additional $17.7 billion of leveraged loans slated for sale to non-bank lenders, according to a report today by Barclays Capital, the investment banking division of Barclays Plc. High-yield, high-risk debt is rated below Baa3 by Moody’s Investors Service and BBB- by S&P.
So-called institutional investors, such as collateralized loan obligations, mutual funds and hedge funds, bought $88.3 billion of leveraged loans this year, credit strategists led by Bradley Rogoff in New York said in the report. That’s more than double the amount last year and surpasses the $71 billion sold in 2008.
“The pipeline for new issues is probably reliant on the equity market right now,” said Oren Cohen, a portfolio manager at Brownstone Asset Management in New York. “There are a lot of jitters in equities and if the market breaks down we may see another correction in the high-yield market as well.”
The S&P 500 Index lost 4.76 percent in August, while returns on the S&P/LSTA US Leveraged Loan 100 Index are flat for the month.
Volatility
The Chicago Board Options Exchange Volatility Index, the benchmark gauge of U.S. stock options that is known as the VIX, jumped 16.5 percent this month on demand for options to protect against further declines in equities.
The biggest price move in August on the S&P/LSTA 100, which tracks the 100 largest dollar-denominated first-lien leveraged loans, was 0.52 cent on the dollar.
Companies continued to market new loans amid the low volatility in the loan market.
Pierre Foods Inc., the maker of pre-cooked meats and ready- to-eat sandwiches owned by Oaktree Capital Management LLC, is leading borrowers raising money this week with a $1.14 billion loan package to finance its merger with Advance Food Co. and Advance Brands LLC.
The Cincinnati-based company is seeking an $835 million first-lien loan, a $230 million second-lien loan and a $75 million revolving credit line.
Credit Suisse Group AG, Barclays, Morgan Stanley, Bank of Montreal and Deutsche Bank AG will host a meeting with lenders after Sept. 6.
“Companies will likely continue to issue high-yield debt knowing they can get the deals done at an attractive spread,” Fitch’s Schmalz said. “If spreads widen further because of economic concerns or because of a flood of new issues, then the primary market may slow a bit.”
To contact the reporters on this story: Emre Peker in New York at epeker2@bloomberg.net; Krista Giovacco in New York at Kgiovacco1@bloomberg.net
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