A Tale of Two Loan Markets

  • Company boosts the size of its U.S. loan by $2.25 billion
  • Other merger financings have struggled amid flight to quality

Even as debt investors punish the riskiest borrowers amid the worst U.S. leveraged-loan slump since 2008, healthier companies are being embraced.

Avago Technologies Ltd. boosted a loan it’s seeking to finance its purchase of chipmaker Broadcom Corp. to $9.75 billion from $7.5 billion. The debt, which is the second largest to be offered to investors in the past five years, also stands out because it pays lenders a below-market rate.

And then there’s the financing for Carlyle Group LP’s buyout of data storage business Veritas. The loan it’s seeking was scaled back on Thursday by almost 40 percent to $1.5 billion while terms were sweetened to attract investors. With leveraged loans heading for their first loss since 2008, lenders are shying away from anything that smacks too much of risk and flocking to higher-quality deals.

"It’s the tale of two cities," said Jonathan Insull, a New York-based money manager at Crescent Capital Group LP, which oversees $18 billion of below-investment grade debt. Deals that investors like "are sailing through pretty unscathed" while "anything with any kind of a story around it" is having a tough time, he said.

Avago’s media department didn’t immediately respond to an e-mail seeking comment. Christopher Ullman, a spokesman for Carlyle, declined to comment.

Highest-Ranking Junk

Avago is rated BB+ by Standard & Poor’s and Ba1 by Moody’s Investors Service, the highest ranking category for below-investment grade debt.

The company will pay interest at 3.5 percentage points more than the variable London interbank offered rate, with a 0.75 percent minimum on the lending benchmark, according to a person with knowledge of the financing. That’s less than last month’s market average of 4.49 percentage-point spread over Libor, according to data compiled by Bloomberg. The company also added a new 500 million euro loan ($541 million) with the same rate, the person said.

Borrowings costs have been rising amid concerns about stress in the commodities sectors and slowing global growth. That’s also hurt issuance. In the U.S., the $335 billion of loans that companies have raised from investors such as mutual funds is down 32 percent from the similar period of 2014, Bloomberg data show.

Appetite for risky assets has weakened. U.S. mutual fund and exchange-traded funds that buy leveraged loans saw $287 million of outflows this week, increasing net redemptions for the year to $13.7 billion, according to Lipper.

Tough Sells

While Avago’s deal saw smooth sailing, other financings have struggled recently.

Last month, Fullbeauty Brands LP, an apparel retailer for plus-sized people, had to offer one of the biggest discounts of the year to convince investors to buy $1.2 billion of loans backing its buyout by Apax Partners, Bloomberg data show. The $345 million portion of the deal was sold at 87 cents on the dollar.

Concordia Healthcare Corp.’s $1.1 billion loan that funded its purchase of drugmaker Amdipharm Mercury Ltd. was offered at 94.5 cents, the data show, after the company struggled to attract debt investors amid a drug-pricing controversy in the pharmaceutical industry.

Veritas reduced the size of a $2.45 billion loan that it was seeking in the U.S. for its buyout by Carlyle by $950 million and is offering to sell it for 95 cents on the dollar, according to people with knowledge of the deal, who asked not to be identified citing lack of authorization to speak publicly. The information management business is rated five levels below investment-grade by Moody’s and S&P.

Investors are being picky in a leveraged-loan market that’s lost 0.84 percent this year, according to the Standard & Poor’s/LSTA U.S. Leveraged Loan 100 index.

"It’s very bifurcated," said Insull.

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