Published June 28, 2013
Market turbulence has prompted U.S. companies to shelve more than $14 billion in loans meant to slice borrowing costs or fund shareholder dividends, confining most issuance to borrowers with imminent financing needs.
At least 15 of these opportunistic deals have been pulled since late-May, with more withdrawals likely, while issuers that have opted to forge ahead with their deals have been forced to sweeten terms to lure investors.
Many companies are looking for some pricing stability, even at higher rates, before again pursuing opportunistic refinancing and dividend funding issues.
"If we stabilize here, a few months from now that might be normal and issuers might not be as apprehensive to jump into the market at these wider levels if it still makes economic sense," said Peter Toal, managing director and head of global leveraged financing syndicate at Barclays.
"The market doesn't have to go all the way back to where it was, and a lot of them can come back," he said.
The Fed's looming tapering propelled 10-year Treasury yields up to nearly 2.70 percent from around 2 percent in a six-week period. The rate has since slipped back to about 2.50 percent.
Asurion, which provides customer services for the mobile phone industry, was one of the few borrowers to retest the choppy waters after pulling a refinancing effort early in June.
The company sliced that proposed $850 million refinancing a few weeks later, returning with a smaller $450 million issue and a much bigger discount of 96.5 versus 99-99.5 guidance.
Privately-held Asurion, through a spokesman, declined to comment.
Most issuers, though, are hovering on the sidelines looking for a new entry point after the markets' kneejerk Fed response.
The biggest loan casualty of the market volatility so far is the $2.3 billion refinancing for automotive supplier Federal-Mogul Corp, which pulled its deal citing market conditions. The Icahn Enterprises unit will "evaluate market conditions and other relevant factors" for refinancing of all or some debt, it said in a press statement.
Coal miner Walter Energy, which shelved a refinancing that sources put at $1.55 billion, said in a filing that it "has no material debt principal payments due until 2015 and requires no incremental funding at this time." The company sold $450 million of senior notes in March and would not have added capital with this funding.
The most recent borrowers scrapping transactions include consumer audio company Beats Electronics, aircraft part manufacturer PRV Aerospace and LANDesk Software, as well as Canadian firms Air Canada and oil and gas company Blackpearl Resources.
John Cokinos, head of leveraged finance capital markets and syndicate at Bank of America Merrill Lynch, said the violent market swing has caused "sticker shock" for issuers, but some will return with stability.
"We may not see the volumes of refinancings we've seen over the past three years, but as the economy starts to grow and we see more confidence in companies pursuing M&A activity, we would hope to see a pickup that will take up some of the refinancing activity," he added.
Refinancing and repricing deals shrank to about 25 percent of the institutional loan pipeline at the end of June from a peak of nearly 90 percent in late January, according to Thomson Reuters LPC.
Some investors welcome this retreat after a tidal wave of opportunistic deals and a prolonged supply-demand imbalance chopped yields.
Average institutional leveraged loan yields fell as low as 4.78 percent in February before volatility swept them up to 5.59 percent in June. That's still sharply lower than 7.39 percent a year ago in June.
"For the long term investor, the pullback has been a positive development," said John Fraser, managing partner at 3i Debt Management US "It's taken some of the hot money and therefore some of the froth out of the market, restoring some rationale to price thinking and to secondary market trading."
Some participants think this is more than a pause.
Rich Farley, leveraged finance partner at law firm Paul Hastings, sees rates rising more as the Fed stops its "morphine drip," closing the opportunistic issuance window further.
"Will there be another interest rate dip? I think it's done. We have had the most robust market in the history of leveraged finance in the past year," he said.
Still, investor demand remains heated, with money pouring into retail mutual loan funds and collateralized loan obligations while exiting many other asset classes. Loans, pegged to Libor, offer floating-rate exposure as rates climb.
Barclays has revised up its 2013 leveraged loan issuance update, excluding refinancings, by $100 billion to $350 billion.
Volume could reach $400 billion, topping the prior institutional loan record of $387 billion in 2007 and $244 billion in 2012, said Toal.
Yields remain historically low, pointing to stepped-up issuance as market turmoil eases, according to Deutsche Bank.
"Even during the sell-off in the second half of 2011, we saw around US$45bn of new issues come to market, of which 45 percent were refinancing," said Kevin Sherlock, head of loan and high yield capital markets at Deutsche. "If market volatility subsides and new issues continue to trade up on the break, I am encouraged that we will see a return to normalized issuance levels."
(Reporting By Lynn Adler and Leela Parker; Editing By Caleb Frazier)