Investors brace for repricing wave as secondary prices soar

By Jonathan Schwarzberg and Lisa Lee

NEW YORK (Reuters) – Rising secondary prices have prompted a new repricing wave in the US leveraged loan market, leaving investors to deal with the pain of reduced yields as issuers line up to take advantage of lower borrowing costs.

Secondary loan prices have risen since they bottomed in February and the most liquid batch of loans have reached 12-month highs. Demand has strengthened due to the anticipation of rising interest rates, while investors have additional cash to put to work after an influx of redemptions among several large names, including Cablevision and Allison Transmission, which are switching out loans for bonds, and Dell, which is paying down a portion of its term loans.

The average bid in the SMi100 (the 100 most widely held loans) reached 98.97 on Wednesday, according to LSTA/Thomson Reuters LPC MTM Pricing. That is more than 2 points up from 96.59 six months ago and even more from 95.3 at the end of February. The average bid in the overall market has also been strong, climbing to 96.79 on Wednesday, a robust gain from 94.84 six months ago and from 94.4 during the gloomy days of February.

“Investors are generally in the mode of wanting to maintain exposure and not generate repayments,” said a banker. “We are seeing a very high percentage of rollover demand and additional appetite coming from both new and existing holders.”

HOW LOW CAN YOU GO?

Those toppy prices have already lured companies to launch repricing deals, and more are expected. The main question in the loan market is how much issuers will be able press their case – whether investors will bear a 25bp, 50bp, or 75bp cut to their spread. The first issuers to the market should serve as a bellwether of just how amenable investors will be.

Golf club operator ClubCorp is looking to cut 25bp from the spread of a US$675m term loan due in December 2022. This would bring the price to 300bp over Libor with a 1% floor after just issuing in December 2015.

American Airlines is aiming to cut pricing by 25bp to 250bp over Libor on a US$750m seven-year term loan that it arranged in October 2014. Surgery Partners is a bit more aggressive, asking investors to lower the price on an US$870m term loan it arranged in July 2014 to back its buyout to 375bp over Libor with a 1% floor from 425bp over Libor.

A repricing attempt will be especially tempting to those issuers that priced loans in the tighter market last spring and many of those with six month call protection should fall off soon. Casino-based real estate investment trust MGM Growth, which priced a US$1.85bn term loan in April at 325bp over Libor with a 0.75% floor to back its spin-off from MGM Resorts International, will see its call protection roll off in October.

Luggage company Samsonite International, which priced a US$675m term loan in April to financing its purchase of luxury luggage specialist Tumi Holdings at 325bp over Libor with a 0.75% floor, will also see call protection drop off in October.

“Anything with call protection rolling off will be a candidate,” said a loan investor.

Due to competing demand from new investing sources, existing lenders may have little choice but to concede to lower spreads, as demand is expected to remain greater than supply. New collateralized loan obligations (CLO), the hungriest of buyers, are out in force with ever more managers looking to raise and price deals.

Bank loan funds have seen their longest stretch of inflows – six back-to-back weeks – since the first half of 2014, boosted by the rise of Libor, which has already caused some loans to become true floating rate instruments again and by the perception of better relative value versus frothy bond counterparts.

Another boon to a repricing wave is the performance of recent repricings. Government services provider SAIC’s repriced US$400m term loan B went above its par issue price to see a 100.5-101 market after freeing to trade in August. Similarly, construction chemical maker GCP Applied Technologies’ repriced US$274m term loan broke above its par issue price in August and now trades bid above 101.

“Thus far, it hasn’t seemed like there is much investors can do, and I doubt that changes,” said a loan trader.

(Reporting by Jonathan Schwarzberg and Lisa Lee; Editing By Michelle Sierra and Chris Mangham)