Loan Market Shows Revival Signs as Rising Prices Fuel DividendsChristine Idzelis
The U.S. leveraged-loan market is showing signs of a recovery after regulatory scrutiny and slumping oil prices curbed issuance.
The price of the debt rallied to 96.48 cents Monday, the highest in nearly three months, according to the Standard & Poor’s/LSTA U.S. Leveraged Loan 100 index, after falling in December to the lowest in more than two years. The rate for new loans dropped to 4.48 percentage points more than lending benchmarks as of Feb. 26 from 4.9 percentage points in January, according to S&P’s Capital IQ Leveraged Commentary & Data.
The market is rebounding amid a slowing investor retreat from U.S. funds that buy high-yield, high-risk loans, which have gained 1.7 percent this year after losing 1.45 percent in the second half of 2014 when oil prices plunged. The revival is helping borrowers command lower rates and emboldening private equity-owned companies such as Tank, a manufacturer of steel containers, to issue loans to pay for shareholder dividends.
“You have a better feeling behind the market,” Michael Contopoulos, the New York-based head of high-yield and leveraged-loan strategy at Bank of America Corp., said in a phone interview.
Drugmaker Par Pharmaceutical Cos., owned by TPG Capital, turned to lenders last month to help finance a $535 million shareholder dividend, according to data compiled by Bloomberg. Par’s loan pushed its debt level to about 6.5 times a measure of earnings, according to a Feb. 9 report from S&P. Moody’s Investors Service estimated last month the deal would increase leverage to about 5.6 times.
Tank is seeking a $440 million loan to refinance debt and to fund a dividend to its private-equity owner Leonard Green & Partners, Bloomberg data show. The company will distribute an estimated $126 million to shareholders, increasing its debt level to 6.2 times a measure of earnings, according to a Moody’s report last week. Commitments from lenders are due March 11, according to data compiled by Bloomberg.
Leveraged lending guidance issued by regulators in 2013 seeking to improve underwriting standards on Wall Street says a debt level of more six times raises concern.
Par and Tank are seeking loans that are covenant-light, meaning they lack financial maintenance requirements that must be met by the borrower, Bloomberg data show.
Vogue International, the haircare-product company in which The Carlyle Group acquired a minority stake last year, sold a $205 million loan in February to pay a dividend, according to data compiled by Bloomberg. Vogue originally pursued the financing in December, according to a Moody’s Investors Service report last month.
While new loan deals may receive a lift from rallying debt prices, increased scrutiny will continue to weigh on issuance. Bank of America estimated in a research report last month that $40 billion to $80 billion in issuance won’t get done this year due to the stricter lending guidance.
Loan prices are up 2.8 percent from last year’s low in December when U.S. oil prices were tumbling below $60 a barrel. Crude rose 3.15 percent in February for the first monthly increase since June. Prices were down less than 1 percent Monday at $49.59 a barrel.
Investors last month snapped a seven-month retreat from U.S. loan funds, which attracted $130 million in the weekly period ended Feb. 18, according to Lipper data. Redemptions resumed last week when investors pulled $118 million. That’s still below last year’s pace, when investors withdrew $1.05 billion in the weekly period through Dec. 10.
“The outflows definitely have subsided,” Contopoulos said.
Also helping demand is issuance of collateralized loan obligations, investment funds that purchase loans and divide them into slices of varying risk and return. Wells Fargo & Co. estimated in a Feb. 27 report that $12.9 billion of CLOs have been created in the U.S. this year, up from $8.9 billion in the comparable period in 2014.
“The CLO buyer is critical,” said Contopoulos.