Companies Tap Loans for M&As, Payouts as U.S. Economy Gets Boost From Fed
Leveraged loans for acquisitions and dividends are outpacing the amount raised to repay debt as companies take advantage of a rally to triple issuance.
The S&P/LSTA US Leveraged Loan 100 Index gained 8.37 percent this year, extending the record returns of 52.2 percent in 2009. High-risk, high-yield loan sales rose to $229.3 billion from $76.6 billion in all of last year, with companies using 53 percent for M&As and payouts, up from 25 percent last year, according to Standard & Poor’s Leveraged Commentary and Data.
Walter Energy Inc., the steelmaking coal producer that’s raising $2.73 billion in loans for a takeover, and Novelis Inc., which is planning a $1.7 billion dividend, are among companies shifting their focus to shareholder distributions and growth from refinancings as economists and investors say the U.S. economy will expand more than previous forecasts. The Federal Reserve’s additional monetary easing and President Barack Obama’s tax-cut extensions come as default rates drop and borrowers chip away at a $324.5 billion maturity wall.
“Corporate balance sheets are healing and we’re starting to see M&A and buybacks pick up again,” said Mark Okada, co- founder and chief investment officer of Highland Capital Management LP with $18 billion in loan investments. “There really was a resurgence in activity and recovery across U.S. capital markets, and certainly there is a lot more to be worried about, but I don’t hear a whole lot of people talking about a double-dip anymore.”
Tax-Cut Extensions
Obama’s agreement with Republican lawmakers to prolong income-tax cuts enacted in 2001 and 2003 by the George W. Bush administration may help raise gross domestic product by as much as half a percentage point to 3.1 percent, according to Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. Tom Porcelli, a senior economist at Royal Bank of Canada, is raising his growth forecast for 2011 by one point, also to 3.1 percent.
The economic boost may also reduce pressure on the central bank to expand its $600 billion bond-purchase program. Fed Chairman Ben S. Bernanke said in an interview broadcast Dec. 5 on CBS Corp.’s “60 Minutes” that the economy is barely expanding and buying more bonds than planned is “certainly possible.”
Pacific Investment Management Co.’s Chief Executive Officer Mohamed El-Erian said the company is raising its U.S. growth forecast on “massive amount” of stimulus by policy makers. Pimco, which manages the world’s biggest bond fund, sees the economy expanding 3 percent to 3.5 percent in the last quarter of 2011, up from a previous estimate of 2 percent to 2.5 percent.
‘Manageable’ Maturity Wall
Since the beginning of 2009, companies tapping lender appetite refinanced 37 percent of leveraged loans maturing through 2014, when the maturity wall peaks at $204.1 billion, according to Bank of America Merrill Lynch. Speculative-grade issuers owe $60.7 billion in loans in 2015 and $80.9 billion the following year.
“The refinancing cliff will be manageable for the next few years,” said Mark Gold, chief investment officer of Hillmark Capital LLC, which has $1 billion of assets under management. “In 2015 we may have to start dealing with it again.”
Leveraged loan default rates dropped to 3.3 percent in November from 3.6 percent in October and 12 percent last year, Moody’s Investors Service said this week in a report. Speculative-grade default rate in the U.S. will drop to 3.1 percent in December from 3.5 percent last month, and to 2.1 percent in a year.
High-yield, high-risk debt is rated below Baa3 by Moody’s and BBB- by Standard & Poor’s.
Walter Energy Acquisition
The share of refinancing transactions in the loan market dropped to 38 percent this year from 49 percent in 2009 as acquisitions picked up, dividend deals jumped to $37 billion from $880 million and leveraged buyouts increased by 2.5 times to $176.7 billion, according to S&P LCD and data compiled by Bloomberg.
Walter Energy agreed to buy Canada’s Western Coal Corp. for C$3.3 billion ($3.3 billion) to add reserves and boost production of the commodity as prices rise.
Morgan Stanley, Credit Agricole SA and Bank of Nova Scotia agreed to arrange a $600 million term loan A and $375 million revolving credit line, both due in five years, as well as a $1.75 billion term loan B maturing in seven years, Tampa, Florida-based Walter Energy said in a Dec. 2 regulatory filing.
In a revolving credit facility, money can be borrowed again once it’s repaid; in a term loan, it can’t. A term loan A is sold primarily to banks, while so-called B loans are mainly bought by non-bank lenders such as collateralized loan obligations, mutual funds and hedge funds.
Novelis Loan Pricing
Novelis, the U.S. aluminum unit of India’s Hindalco Industries Ltd., reduced pricing yesterday on a $1.5 billion term loan it’s seeking to refinance debt and fund a dividend.
Moody’s cut the company’s credit rating by one step to B1, citing the $4 billion restructuring of Atlanta-based Novelis’s balance sheet and the increase in leverage to 4 times from 2.9 times. Leverage is the measure of debt to earnings before interest, taxes, depreciation and amortization.
KKR & Co., Vestar Capital Partners and Centerview Partners, which agreed to buy Del Monte Foods Co. for $5.3 billion, may raise as much as $4.6 billion of debt to help pay for the LBO.
JPMorgan, Barclays Plc, Morgan Stanley, Bank of America Corp. and the lending arm of New York-based KKR will provide the financing, San Francisco-based Del Monte said in a Nov. 30 regulatory filing.
The lenders committed to arrange senior secured loans consisting of $2.5 billion term debt and a $500 million revolving credit line, as well as $1.6 billion in senior unsecured increasing rate bridge financing, the filing shows.
“Next year we’ll see more M&A deals and more LBOs,” said George Goudelias, who manages $4.3 billion of high-yield loans and bonds at Seix Investment Advisors LLC. “Refinancings probably won’t be as active.”
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.
To contact the editor responsible for this story: Faris Khan at fkhan33@bloomberg.net.
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