Credit Investors Start to Say ‘Enough.’ At Least Sometimes.By and
In four recent debt deals, borrowers had to pay up or pull out
Too soon to say market is turning, as exuberance persists
Credit market investors who’ve been piling on the risk in search of higher returns are showing they’re not going to roll over completely.
In at least four deals over the past week, money managers said, “enough,” forcing companies to pay more to borrow, agree to tighter terms, or postpone debt sales entirely. Computer security firm McAfee slashed a loan deal and paid higher interest when it sought to borrow more than $4 billion this week. Syngenta AG, a Swiss agricultural supplies company, postponed one of biggest debt offerings to hit the Asian bond market this year.
“When issuers are pushing aggressive terms, you need to resist,” said Wayne Hosang, a portfolio manager at Crescent Capital Group LP, with about $25 billion of assets under management. “Investors are becoming more cautious generally, with the credit cycle being extremely long, geopolitical uncertainties and some policy stalemates in the U.S.”
Satellite company Telesat Canada had to pull a $2.41 billion offering designed to cut the rate on an existing loan, people with knowledge of the matter said on Wednesday. And Avantor Inc., a specialty chemicals maker, had to pay higher yields on a $7.5 billion debt offering that is financing an acquisition.
It’s too soon to say these moments of mutiny mark a turning point for corporate debt markets. Private equity firms have sought to raise $18 billion in the loan markets this year to pay themselves dividends from companies they own, putting 2017 on pace for a record year. Junk-bond issuance this September is on track to be the highest for the month since at least 2014. Loans to speculative-grade companies have jumped to $747.9 billion this year from $287.7 billion at the same point last year, according to data compiled by Bloomberg. Strong supply often makes it easier for investors to be choosy.
And the extra yield that investors demand for buying junk bonds compared with Treasuries hasn’t been surging, which would be a sign of greater unease about credit risk. In fact those spreads have narrowed this month, according to data compiled by Bloomberg.
“Unfortunately, the tide isn’t turning yet,” said Christian Hoffmann, a money manager at Thornburg Investment Management, which oversees $50 billion. “If no deal receives pushback, the bankers probably aren’t trying hard enough.”
McAfee’s Adjusted Earnings
McAfee, for example, still sold enough loans to pay a dividend of close to $1.5 billion for its owners, after originally seeking to dole out $2 billion. Investors bought the loans even though the computer-security company used accounting adjustments known as add-backs to boost a measure of its earnings and make itself look more creditworthy. The company’s adjusted earnings before interest, taxes, depreciation and amortization were $765 million. When the company was still part of Intel Corp., its reported Ebitda for 2016 was $238 million, according to investors who examined the deal.
Those investors said they would’ve been comfortable with the company boosting Ebitda to about $500 million because of one-time costs associated with McAfee’s separation from Intel and the transaction’s accounting impact. Michael Berry, McAfee’s chief financial officer, said the company was confident in the figures provided to lenders and he believes “the company is positioned with a solid financial profile going forward.”
At the smaller end of the market, Z Capital Partners returned to the market this week with a loan deal for its casino operator Affinity Gaming, after pulling a plan that envisaged a $100 million dividend in August. The revamped deal included a smaller $75 million dividend after investors pushed back on some of the terms, including the payout, according to a person familiar with the matter who asked not to be identified discussing a private transaction. Representatives for Z Capital and Affinity declined to comment.
For loans, covenant strength is near a record low, as tracked by Moody’s Analytics, with 75 percent of new loans in the $1 trillion leveraged-loan market now defined as “covenant-lite.”
Add it all up, and maybe investors are still being too complacent, said Randy Schwimmer, senior managing director at Churchill Asset Management LLC.
“You can’t always chase credits expecting that the economy will continue to grow and that everything is going to be great,” he said. “We know at some point it won’t be.”
— With assistance by Sridhar Natarajan, and Lara Wieczezynski