Must-know: Why refinancing remains the focus for leveraged loans

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Repricing proposals

Unlike the previous week, last week, issuers swarmed the market with repricing deals. Nearly half of the deals were refinancing. This shows that issuers are looking to capitalize on bullish market conditions before analysts expect any further rise in the U.S. ten-year Treasury yield following Janet Yellen’s comments slowing down the fixed income market. A good number of dividend recapitalization and M&A also hit the market compared to the previous week.

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Leveraged loans generally pay a quarterly floating rate quoted as a spread to a benchmark (for example, LIBOR[1. “LIBOR” stands for the London Interbank Overnight Rate. This is the benchmark interest rate for many adjustable-rate mortgages, business loans, and financial instruments traded on the global financial market. Currently, the three-month LIBOR rate is 0.24%.] + 125 basis points). LIBOR is a reference rate that moves with overall interest rates. In an environment of increasing interest rates, issuers may have to expand the spread terms of leveraged loans to persuade demand in the market. The U.S. ten-year Treasury yield is trailing at 6 basis points above from the previous week.

Leverage Loan weekly Deals- By Purpose_Feb 14, 2014

The S&P/LSTA U.S. Leveraged Loan 100 Index, which tracks loans in the B to BB rated category, declined moderately last week. The main leveraged loan ETF (BKLN) fell accordingly, trailing at 30 basis points below the previous week.

The market flex activity, which is a simple way to gauge investor push-back in the leveraged loan market, shows more investor-friendly activity. This means investors aren’t accepting anything offered to them and are rather pushing back for better terms on pricing and other terms to ensure they’re well compensated for the risk.

Evidently, the deal flows last week in the leveraged financial market remained optimistic. The contracting credit spreads for leveraged loans are detrimental to loan prices, while on the high yield bond side, they help offset price declines from increased underlying rates. Read on to the next part of this series for a more detailed outlook on the U.S. leveraged financial market.

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