Why debt managers love volatility

It’s not yet clear if the leveraged finance market will continue to stutter or if it’s just taking time for bank lenders and high-yield investors to return to business as usual. In the meantime, private debt managers are making hay.

The high-yield bond and syndicated loan markets have had private debt managers transfixed lately, with all eyes in particular on Symantec’s sale of data storage business Veritas to The Carlyle Group and GIC.

Agreed in August 2015, the deal’s original $3.3 billion loan and $2.28 billion bond package took months to come together, and was shunned by both the high-yield and leveraged loan markets even when the underwriters reportedly took measures to sweeten the deal for investors. The latest twist came this week, when the sale price was cut from $8 billion to $7.4 billion, allowing the debt financing underwriters to reduce the deal’s debt package by $1.2 billion.

This isn’t the only private equity deal struggling to syndicate its financing. Last week, it emerged that KKR’s private equity arm had struggled to find lenders to back its $1.2 billion acquisition of Mill Fleet Farm, a US regional retail chain. After shopping the deal with around 20 banks, KKR reportedly sold the debt financing down to pension funds and asset managers itself, according to Reuters.

The reason this deal and, more broadly, the high-yield bond and syndicated loan markets are holding the attention of debt managers is that a stuttering liquid leveraged finance market means a positive trickle down for more flexible private credit providers.

The wobbles in the US large-cap leveraged finance market started last year and have continued into the first three weeks of 2016. One mid-market private lender estimated that pricing has increased around 100bps since the summer on the back of syndicated loan and high-yield bond market wobbles.

In Europe, in the last quarter of 2015, lenders were forced to reduce the leverage on Global Blue’s €572 million loan from 4.5x to 3.7x. Since the market reopened in January high-yield bond prices have fallen. On the leveraged loan market, deals have launched this year but one advisory source says everyone is waiting to see how syndications go for the first transactions. One such is the £620 million-equivalent ($890 million; €822 million) of sterling and euro debt backing TDR Capital’s £1.3 billion acquisition of fuel retailer Euro Garages which was launched in the first week of January.

Substantial falls in equity markets and wider macro disquiet have had an impact on the more liquid elements of the leveraged finance markets that the bulk of private debt managers focus on. Those same managers aren’t just hanging around waiting to see how it all pans out, of course. Funds are actively pitching for business that in a stronger credit market would go elsewhere, says the advisory source.

Their pitch of flexibility, long-term match funding and most importantly, certainty of execution, is brought most sharply into relief when there is less confidence in other credit markets.

Thus, in contrast to the rest of the investment community, debt managers are, for the medium-term at least, hoping that the very volatility drawing attention among the business titans gathered this week in Davos doesn’t halt too quickly.