Investors are getting tired of yields being squeezed on risky U.S. corporate loans this year.
Leveraged loans dropped to their lowest level in four months amid a pullback by buyers stung by borrowers such as Dollar Tree Inc. and Goodyear Tire & Rubber Co., who have taken advantage of a paucity of new deals by seeking to lower payments on existing debt. Barclays Plc last week cut its 2015 forecast for U.S. leveraged-loan issuance to as little as $250 billion as regulatory scrutiny slows the pace of buyout financings.
Investors who buy leveraged loans are caught in a bind. A push by regulators to curb risky underwriting practices has left them with fewer deals to chase, while the interest they earn on the loans they hold falls. Sentiment has also been weighed down by a global bond rout that has sent Treasury yields to levels not seen since October.
“Buyers are pulling back from paying a premium due to the fear they will be hurt by a refinancing in very short order,” said Jason Rosiak, head of portfolio management at Newport Beach, California-based Pacific Asset Management. “That weighs on the overall market.”
Loans prices dropped to 95.9 cents on the dollar on Wednesday, after falling each of the past three weeks in the longest such stretch since the fourth quarter, according to the Standard & Poor’s/LSTA U.S. Leveraged Loan 100 Index. The debt lost 0.36 percent this month, after gaining just 0.05 percent in May, the smallest monthly return of the year.
Leveraged loans have also been dragged down by the recent volatility in the global bond and equities markets, though to a smaller degree, as investors sold off riskier assets, according to Rosiak.
“The market is a little more risk adverse, given what’s happened in high-yield bonds and equities,” said Mark Okada, chief investment officer of Dallas-based Highland Capital Management. “It’s just a bit of a sentiment move.”
Borrowers have sought to lower the rate on about $6 billion of leveraged loans this month, following $35 billion in May, according to data compiled by Bloomberg. Rates on more than $60 billion of the debt have been cut or are being reduced this year, Bloomberg data show.
Yields have fallen as a result to 5.08 percent in June from about 6.3 percent in January, according to S&P Capital IQ Leveraged Commentary & Data.
“The re-pricings have been coming fast and furious,” Jonathan Insull, a New York-based money manager at Crescent Capital Group LP, which oversees about $17 billion of speculative-grade debt, said in a phone interview. “I think people are just skittish.”
Dollar Tree, a discount retailer rated two-levels below investment grade, cut the rate by 0.75 percentage point on $3.3 billion of debt issued in February to help finance its pending purchase of Family Dollar Stores Inc., Bloomberg data show.
The Chesapeake, Virginia-based company will pay interest on the loan at 2.75 percentage points more than the London interbank offered rate with a 0.75 percent minimum on the lending benchmark, the data show. The debt was quoted as high as 101.5 cents on the dollar this year, falling Wednesday to as low as 100.94 cents, the day after the refinanced deal was allocated to investors, Bloomberg data show.
Randy Guiler, an investor relations representative at Dollar Tree, declined to comment.
Goodyear, the Akron, Ohio-based tire maker, is seeking to lower interest by as much as 1.25 percentage points on its $1 billion second-lien loan, according to a person with knowledge of the of the deal, who asked not to be identified citing lack of authorization to speak publicly. The company has proposed paying 2.75 percentage points to 3 percentage points more than Libor, with a 0.75 percent minimum on the lending benchmark.
Keith Price, a spokesman for Goodyear, declined to comment.
Potential deals backing mergers may help rebalance loan issuance and demand. Larger acquisition financings that may come to market later this year include debt backing Charter Communications Inc.’s $55 billion purchase of Time Warner Cable Inc.
“In this market environment we are a little bit more apt to be selective with our cash, and wait for opportunities,” said Rosiak.