Repricing leveraged loans saves U.S. companies millions of dollars

By Jonathan Schwarzberg

NEW YORK (Reuters) - Home security systems company ADT Corp has returned to the US leveraged loan market to slash its borrowing cost by repricing its April buyout loan for the second time, as a lack of loans leaves investors with few options but to agree.

The US market has been hit by a repricing wave that began this summer, which is also being seen in Europe, after lending slowed on both sides of the Atlantic due to regulation and volatility surrounding Britain’s vote to leave the European Union in June and the US election in early November.

Companies are returning to the US leveraged loan market for multiple repricings at the fastest pace since 2014 to take advantage of favorable borrowing conditions and reduce their borrowing costs as investors’ portfolios feel the strain.

“There’s just not much to do but grin and bear it. If you like the loans then you have to keep them,” an investor said.

ADT Corp is seeking to cut its borrowing costs to 325bp over Libor by repricing a term loan due May 2022 that it already cut to 350bp in June, giving a total 75bp saving from its buyout financing in June. It is also expected to increase the size of the deal to US$2.763bn as the company boosts the facility to pay down a US$1.095bn term loan due in 2021.

Rackspace Hosting is back in the market with its second deal just over a month after completing a US$2bn loan that supported its buyout by Apollo Global Management. That loan, which was signed on October 26, is being repriced to 350bp from 400bp, giving a 50bp saving.

At least four other companies, including grocery store chain Albertsons, movie theater chain Cinemark, and tracking technology provider Zebra Technologies, have returned to the market for their second deals of the year to reprice existing loans by as much as 150bp.

Private equity companies tend to be more aggressive on repricing, but public companies are also staging a rapid return to the market to reprice, as Zebra Technologies and Cinemark have shown. Zebra Technologies successfully lowered pricing on a US$1.723bn term loan to 250bp over Libor on December 2 after decreasing the rate to 325bp in May. The loan originally priced at 400bp in September 2014.

“It’s unusual but given the rally in the loan market and the dearth of M&A-driven new issue supply, borrowers can demand lower borrowing costs, and loan investors are willing to accommodate to remain fully invested,” a banker said.

Borrowers have been encouraged to come back to the market to slash pricing almost as soon as deals are signed due to high secondary prices. Deals have been few and far between in 2016 and demand has considerably outstripped supply, driving secondary prices higher.

Toppy secondary prices reduce returns and allow companies to refinance at lower yields. Repricings are not popular with investors, particularly Collateralised Loan Obligation funds, the biggest buyers of leveraged loans, which need to maintain pricing across their portfolios, but have little option to stay invested.

The percentage of loans trading over face value, or par, climbed to 38.8% on December 7, according to Thomson Reuters LPC data, which is the highest level since July 2014.

This is one percentage point higher than the share of loans trading at near-par levels of 98-100 of 39.8%. The percentage of par plus loans has not exceeded near par loans since April 2014.

The SMi100, which measures the top 100 leveraged loans, is now trading at 98.9, after rallying from lows of 95.3 in February after a rise in the oil prices and increasing demand for loans as a prospective hedge against interest rate rises.

While markets rarely allow companies to return to reprice deals more than once a year, a similar refinancing wave was seen in 2013-14, as fears of an interest rate rise boosted inflows into leveraged loans and pushed secondary prices higher.

“Both 2013 and 2014 saw more than a handful (of repricings),” the banker said. “If a company is performing well it certainly can happen in any given year.”

Repricing is expected to persist into early 2017 until an upturn of M&A brings new deals to the market and eases the supply-demand imbalance, investors say.

(Reporting by Jonathan Schwarzberg; Editing by Michelle Sierra and Tessa Walsh.)

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