The cost to raise money in the U.S. leveraged-loan market jumped to the highest level this year as sovereign-debt concerns threatened to dampen the global economic recovery.
The spread on institutional term loans rated B+ or B by Standard & Poor’s rose to 6.42 percentage points yesterday, the highest level since November, according to Standard & Poor’s Leveraged Commentary & Data. Virtu Financial LLC increased the spread it offered investors by 1 percentage point this week as two deals worth $700 million were shelved the previous week, according to data compiled by Bloomberg.
Lenders are demanding more yield to get new leveraged-loan transactions done as efforts to restructure Greece’s sovereign debt were hampered when two rating companies said they would consider a debt restructuring plan to be a default. Higher financing costs could affect a large merger and acquisition calendar as companies look to the loan market to fund buyouts.
“There’s a change in sentiment; Greece was the trigger and the repricing of sovereign debt was the step that caused this reevaluation of pricing,” said Richard Farley, a New York-based attorney with Paul Hastings Janofsky & Walker LLP, which advises banks that syndicate loans. “You have people taking a breather and asking if things are priced appropriately.”
Pricing for debt rated B+ or B has risen 107 basis points as of yesterday from 5.35 percentage points in May, according to S&P’s LCD. The average all-in spread -- which includes upfront fees amortized over an assumed three-year life and Libor floors -- was at a record low of 2.14 percent in February 2007 as the buyout boom was peaking. Institutional term loans are sold mainly to non-bank lenders such as collateralized loan obligations, mutual funds and hedge funds.
Virtu Financial, a provider of automated market-making services, increased the interest rate it’s offering lenders on a $320 million term loan to 6 percentage points more than the London interbank offered rate from a previously offered 5 percentage points over the lending benchmark, according to a person with knowledge of the deal.
The five-year debt will also have a 1.5 percent Libor floor, compared with the originally offered 1.25 percent minimum, said the person, who declined to be identified because the terms are private. Proceeds from the loan will be used to fund its acquisition of Madison Tyler Holdings.
The new interest rate and Libor floor will increase Virtu’s yearly interest cost by $4 million. Credit Suisse Group AG, Bank of America Corp. and Barclays Plc arranged the transaction, according to the person.
The five-year debt, sold to investors at 98 cents on the dollar, began trading at 99 cents yesterday, according to information provider Markit Group Ltd.
The S&P/LSTA Leveraged Loan 100 Index, which tracks the 100 largest dollar-denominated first-lien leveraged loans, gained 0.02 cent July 6 to 94.77 cents on the dollar. The index is up from a low of 59.2 cents on Dec. 17, 2008, three months after Lehman Brothers Holdings Inc. collapsed. High-yield, high-risk bonds and leveraged loans are rated below Baa3 by Moody’s Investors Service and lower than BBB- by S&P.
“On a stand-alone basis loans have performed well, but relative to other asset classes they have lagged,” said Chris Taggert, an analyst at New York-based CreditSights Inc. “There are a lot of challenges on the economic front, but company earnings have performed fairly well and as a secured investor, performing fairly well is a good outcome.”
Concerns about the contagion effect caused by a possible Greek default coupled with indications that the expansion of the world’s largest economy has slowed have made investors wary.
Economists lowered their U.S. growth forecasts for the year, with a median estimate of 2.5 percent, compared with 3.1 percent three months ago, Bloomberg data show.
Potential Greek Default
S&P and Fitch Ratings indicated they would cut Greece to default if European leaders went ahead with a plan to ask creditors to roll over Greek bonds into new debt. Earlier this month, finance ministers authorized an 8.7 billion-euro ($12.4 billion) loan payout to Greece in an attempt to avert the region’s first sovereign default.
Companies were in the market this week seeking as much as $5.2 billion of loans to back buyouts, according to data compiled by Bloomberg. DG FastChannel Inc. (DGIT), the network operator that links advertisers with radio and television stations, is seeking $640 million in loans to back its buyout of MediaMind Technologies Inc. (MDMD) and Blackboard Inc. (BBBB), the education-software maker being acquired by Providence Equity Partners Inc., received $1.15 billion in debt-financing commitments.
Global mergers and acquisitions announced this year are up 32.1 percent from 2010 when they totaled $2.22 trillion, Bloomberg data show. The value of the 13,529 deals this year totals $1.29 trillion, compared with $976.2 billion in the same period in 2010.
“Any deal that’s already committed will get done,” said Farley of Paul Hastings. “It’s just a question of how much flex will be used and if there will be a restructuring or maybe going out with a second-lien piece or a larger bond component.”
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