Apollo Tries to See Just How Much Loan Investors Will Bendby and
Already seeking cheaper terms on last month’s Rackspace deal
‘Squeeze out whatever you can,’ is the motto of year-end rush
Just one month after getting loan investors to pony up $2 billion, Apollo Global Management is convinced it can get a cheaper rate on its latest buyout debt.
The private-equity giant is trying to drive down the interest it pays on the loans obtained last month for the purchase of cloud-services company Rackspace Hosting Inc. It’s an attempt to see how much investors will forgive as they figure out how to work the cash that is inundating the asset class at the fastest pace in more than three years.
Yet even in the leveraged-loan market, where investors have gotten used to companies taking advantage of weak restrictions on repaying debt, an attempt to "reprice" a loan within weeks of procuring it is unusual.
"It’s very aggressive to flip it so quickly," Charles Tricomi of Xtract Research LLC said in an interview. "In this market there are so few attractive yields that borrowers have all the leverage. They can basically call the shots."
With time running out for putting together fresh deals before year-end, bankers and corporate issuers are exploiting the chance to lower interest on their borrowings amid red-hot demand. About $5.8 billion has found its way to leveraged loans in the past two months, with $1.76 billion of inflows this week alone, data from Lipper show. That’s the biggest tally for the period since August 2013. Last week, another Apollo-owned company, ADT Corp., came to market for the third time this year to win more favorable terms on its loans.
Apollo declined to comment on the deal, referring to a statement by co-founder Josh Harris from the company’s Oct. 28 earnings call saying investors have consistently supported the firm’s transactions. Rackspace declined to comment.
Unlike junk bonds, which have much more onerous terms on pre-paying the debt, the loan market has evolved to provide companies the flexibility to tinker with the borrowings. Even with loans that have six-month "call protection," companies can pay a small premium to weaken the covenant and push for better terms in stronger markets.
"When you are paying so much for valuations, you have to squeeze out whatever you can," said Jeff Sujitno, a portfolio manager at IA Clarington Investments Inc. "That’s what financial sponsors do."
Charter Communications Inc. launched a new repricing attempt of its own on about $3.8 billion of loans on Friday. Not only is the cable provider attempting to lower the rate on the loan, it is also seeking to remove a minimum level on the lending benchmark. Investors stand to lose out on the protection afforded by the "Libor floor," which provides a guaranteed minimum coupon on the borrowing, if the benchmark were to start decreasing again.
The period since the Thanksgiving break in the U.S. markets has been one of the busiest stretches for repricings on U.S. leveraged loans this year, according to data compiled by Bloomberg. Home-security provider ADT, which sold its buyout loan close to the bottom of the market this year, has returned twice to slash the rate on its debt.
Technology company MKS Instruments has been busy hunting for discounts, as well. The company, which sold a $780 million loan in April for the acquisition of Newport Corp., first cut the price on that loan after a month and then returned last week to chip away at the coupon.
The largest exchange-traded fund that invests in the floating-rate debt is poised to report one of the biggest weeks of deposits this year, with its assets surging to a more than two-year high.
"With so much cash coming in to the asset class, you can’t risk losing out on the loan you hold," Sujitno said.