Will relief for US lenders last?(1)

A burst of rationality seems to have struck the US leveraged loan market with investors demanding higher pricing and even pushing back on loose structures. Will it last and should lenders be wary if it does?

There has been a shift in the US leveraged loan market in recent weeks, sources tell PDI. Pricing has risen. What’s more, a few attempts at introducing looser covenant packages to mid-market deals have received push-back. Some “rationality” has returned to the market, one private debt manager said. 

Thus far, the evidence is anecdotal. Earlier this month, Jefferies was forced to sweeten pricing on a $350 million loan deal it was syndicating for software firm Idera by adding an original issue discount (OID). 

Last week, the banks leading FullBeauty’s $1.2 billion loan package, Goldman Sachs and JPMorgan, had to lower the OID to 96 on the senior tranche and around 86 on the second lien debt. The deal, in support of Apax Partner’s acquisition of a controlling stake in the beauty products producer, is said to increase the leverage at FullBeauty to around 7x. 

One source estimated that pricing had risen on average by roughly 50 basis points. 

But it doesn’t end with better returns. Lenders are also pushing for stronger structures. Along with a chunky OID, the $245 million senior secured loan backing Lone Star’s acquisition of Foundation Building Materials had to have a covenant inserted in order to reach the finish line. It was part of a package including a $50 million asset-based senior secured revolver and an $80 million second lien credit line. The deal bumped the construction materials distributor’s leverage up to around 7-7.25x, according to ratings agency Moody’s

Some of the large-cap deals struggling in syndication have had to become more flexible on the details of their documentation, says Proskauer partner Bill Brady. He’s worked on a couple of deals that have struggled and has had success in pushing more mid-market-esque junior creditor-friendly terms into intercreditor agreements. 

One example he gave was removing the requirement for junior creditors to automatically release any liens should the senior creditors give up their claims. 

That’s a trend that is yet to cross the Atlantic, one European debt manager said.

Market participants aren’t pointing to a particular reason when asked what’s prompted the shift in attitude. “It’s not China, it’s not Greece, it’s not Syria,” said another source before concluding that it was likely driven by nervousness within the market. 

Those nerves, he added, could clear up very quickly. So in the short-term, it’s a great time to buy assets, he concluded.
In the longer-term, though, it throws up some questions. Should wider market nervousness seeping into the credit markets take hold, the turn in the credit cycle could start earlier than anticipated. 

And if lenders pull back, history tells us what happens next.