KKR, CVC Cut Costs as Refinancings Expand Sixfold on Leveraged-Loan Rally
Private-equity owned companies are refinancing six times as much of their leveraged loans this month than they did in all of January, using the longest rally in more than a year to cut costs.
Univar Inc., owned by CVC Capital Partners Ltd. and Clayton, Dubilier & Rice LLC, and KKR & Co.’s marketing and publishing firm Visant Corp., lead $37 billion of loan issuance to replace higher-cost debt, up from $6.2 billion last month, according to data compiled by Bloomberg.
Investors are pouring record amounts of cash into loan funds, seeking to protect against rising rates as U.S. Treasury yields climb the most in more than 4 1/2 years amid signs that the economic recovery is picking up speed, allowing the neediest borrowers to reduce interest expenses and delay maturities on debt used for buyouts and dividends. The S&P/LSTA U.S. Leveraged Loan 100 Index rose 0.11 cents to 96.41 cents on the dollar as of yesterday, extending gains for an 11th straight week, the longest stretch since the period ended Jan. 22, 2010.
“This bodes well for lower quality credit,” said Michael Anderson, a high-yield debt strategist at Citigroup Inc. “Higher-beta, low-price loans can do better because of a technical imbalance created by strong inflows and modest new supply, M&A at improving enterprise multiples, and many higher quality loans getting re-priced.”
Companies raised or started lender talks this week on $15.1 billion of leveraged loans, 79 percent the total, intended to reduce borrowing costs, Bloomberg data show. The debt is rated below Baa3 by Moody’s Investors Service and lower than BBB- by Standard & Poor’s.
Rising Treasury Yields
The cost of issuing lower-quality leveraged loans dropped to 5.01 percentage points this month from 5.7 percentage points in January and 6.39 percentage points at the end of 2010, according to S&P Leveraged Commentary and Data. High-yield, high-risk loans pay interest tied to benchmarks such as the London interbank offered rate and provide a hedge against a rise in rates linked to Treasuries.
Yields on 10-year U.S. government bonds pared gains to 3.57 percent as of yesterday after rising to 3.74 percent on Feb. 8, the highest since April 28, according to Bloomberg data. They are rising for a sixth consecutive month, the biggest stretch since the period ended June 2006.
“People marked up their forecasts for growth and reduced their fears of deflation, the combination of those drove up interest rate costs,” said Josh Feinman, chief economist at DB Advisors, unit of Deutsche Bank AG that manages $231 billion of assets.
Funds investing in loans received a record $1.05 billion last week, according to Deutsche Bank reports citing Lipper FMI. Investors flooded the market with $5.35 billion this year, building up on $3.1 billion of inflows in December, which was then a monthly high.
“In the weeks we had big moves in the rate market we had huge inflows to loan mutual funds,” Citigroup’s Anderson said in a telephone interview from his New York office. “You want to get ahead of the interest-rate trade because expectations can change very quickly.”
The Federal Reserve raised its inflation-adjusted economic growth forecast to 3.4 percent to 3.9 percent, according to the minutes of a Jan. 25-26 meeting released this week. Central bankers said in November that gross domestic product would grow at 3 percent to 3.6 percent.
Manufacturers in the Philadelphia region are expanding output at the fastest pace in seven years on demand for new equipment and increasing exports, according to Fed data, and housing starts climbed 15 percent to a 596,000 annual rate as builders began to work on more homes than forecast in January, according to the Commerce Department and a Bloomberg News survey.
‘Search for Yield’
“Credit markets are much more open, risk appetite is higher, there’s a search for yield, the corporate sector is in better shape and people are more confident in the economic cycle,” DB Advisor’s Feinman said in a telephone interview from his New York office. “All of that would suggest a better environment for coming to the credit markets.”
Univar, taken private for about $2.1 billion in 2007 by London-based private-equity firm CVC, started lender talks this week to refinance buyout debt and borrowings used to fund a dividend with a $1.98 billion term loan.
The Kirkland, Washington-based industrial chemicals distributor is rated B2 by Moody’s and B by S&P, both five levels below investment grade.
Initial pricing on the new loan due June 2017 is 3.5 percentage points more than the Libor with a 1.5 percent floor on the lending benchmark. Univar will issue the debt at par.
Value ‘Priced Out’
That compares with the $300 million loan Univar raised for a payout in November that was issued at 99 cents on the dollar and pays a spread of 4.5 percentage points over Libor, which has a 1.5 percent floor, according to Bloomberg data.
The company in August sought an amendment to push out maturities on buyout loans by two years to 2016, offering lenders an interest-rate increase of 1.5 percentage points to 4.5 percentage points more than Libor and adding a 1.75 percent floor to the benchmark, Bloomberg data show.
Visant, created by New York-based KKR in 2004 by merging at least three companies, is seeking to cut the interest rate it pays on a $1.25 billion term loan by 1.75 percentage points, reducing both the spread and the Libor floor.
The Armonk, New York-based company issued the debt in September at 98 cents on the dollar with a one-year soft-call protection of 101 cents on the dollar, Bloomberg data show. Visant, rated B2 by Moody’s and B+ by S&P, used the proceeds to pay a $517 million dividend and refinance debt.
Lenders will get a soft-call protection expiring in September on the new loan, which will be issued at par.
“A lot of the value is getting priced out of the leveraged-loan market,” Citigroup’s Anderson said. “Compared to other asset classes which have also run up, it doesn’t look bad.”
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