U.S. leveraged loan market strong post Brexit vote

By Jonathan Schwarzberg

NEW YORK (Reuters) – Outside of a pair of opportunistic leveraged loan deals that were shelved following the announcement that the United Kingdom had voted to pull out of the European Union, the news is not all dire in the U.S. leveraged loan market.

Confidence that leveraged loans, rated below investment grade and considered riskier, would avoid a complete shutdown following the vote in the UK, commonly referred to as Brexit, has been buoyed by equity markets in the U.S. that bounced back sharply after initially dropping more than 5 percent on the news.

Since the June 23 referendum, other deals have priced on track, and Global Brass and Copper even tightened pricing on a $320 million refinancing loan to 425 basis points over Libor from guidance of 450 basis points over Libor.

“We’re definitely feeling a bit better over the last 48 hours,” said a banker on Wednesday as the stock market ticked higher and then higher again. “But we’re going to need to continue to see an improved equity and credit market before leveraged finance really opens up again.”

The leveraged loan pipeline is even building. Film studio Lionsgate announced Thursday that it had netted $4.6 billion of debt commitments to finance the acquisition of cable channel Starz. JP Morgan, Bank of America Merrill Lynch and Deutsche Bank agreed to provide $3.6 billion of secured and unsecured debt to back the transaction, as well as a $1 billion revolving credit facility.

Barclays, Royal Bank of Canada, Jefferies and PSP Investment offered to back private equity firm Apollo Global Management’s $2.2 billion buyout of vacation destination provider Diamond Resort with commitments for a $1.2 billion term loan facility, a $100 million secured revolving credit facility and a $600 million unsecured bridge facility.

Issuers are still cautious, given the heightened volatility that Brexit spurred in the equity markets. In the near future, the leveraged loan market is anticipated to be limited to more time sensitive financings like those required for mergers and acquisitions and refinancing for near-term maturities, said another banker.

BREXIT CASUALTIES

On Wednesday online media and software company Internet Brands decided to shelve a $150 million delayed-draw term loan, while proceeding with a planned $175 million incremental first-lien term loan.

The $175 million loan was in the works before Brexit and backs a dividend to the company’s shareholders while the delayed-draw term loan was more opportunistic in nature and slated for general corporate purposes.

The incremental term loan priced at a discount of 99.04 cents on the dollar, which was in line with the guidance.

The other pulled deal following Brexit backed a repricing of staffing agency On Assignment’s $825 million term loan. As secondary prices dropped following Brexit, it became difficult to justify repricing deals, and after a small wave of repricings over the past several weeks, this activity is expected to dry up, bankers said.

A few other deals remain in the market, including a $500 million term loan backing Arbor Pharmaceuticals’ acquisition of drugmaker XenoPort and a $375 million term loan supporting Canadian baked goods maker Give & Go Prepared Foods’ buyout by Thomas H. Lee Partners.

Despite the fact that deals are still being announced and most are pricing, volume in the leveraged loan market is expected to taper after the second quarter saw a huge influx of deals.

Syndicated lending in the United States was up 55 percent in the second quarter compared to the first quarter overall with leveraged lending climbing to $214 billion for the quarter, which was up 64 percent from the first quarter, according to data from Thomson Reuters LPC.

(Reporting By Jonathan Schwarzberg; Editing by Michelle Sierra and Christopher Mangham)