Must-know: Why re-pricing transactions dominate leverage loans


Jul. 21 2014, Updated 4:00 p.m. ET

Re-pricing transactions dominate leverage loans

Market conditions continued to be favorable for leveraged loans issuers. However, issuance levels were down by ~24% week-over-week (or WoW) in the leveraged loans (BKLN) primary market in the week ending July 11. A total of $16.2 billion was issued in 13 transactions. This was down from the $21.3 billion over 14 deals issued in the previous week (Source: S&P Capital IQ/LCD).

Issuer rationale

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Repricing transactions, financing for leveraged buyouts, and Collateralized Debt Obligations were the dominant reasons why issuers took recourse to the leveraged loans market last week. There were five reprising transactions in the week ending July 11 because it made sense for borrowers to take advantage of the low yields and spreads prevailing in the market.

Leveraged buyout-related issuance

Major issues whose proceeds are earmarked for financing leveraged buyout (or LBO) deals included Advantage Sales & Marketing’s (or ASM) $2.6 billion cov-lite issue. ASM provides sales, marketing, and merchandising services to primarily consumer packaged goods companies and retailers.

ASM is supposed be acquired by private equity firms Leonard Green & Partners and CVC Capital Partners in a LBO deal estimated at $4 billion. The proceeds from the debt issue will be used to back the LBO of the company.

The $2.6 billion issue was split into first and second lien term loans. The $1.9 billion first lien seven-year term loan was rated B1 and B, while the $760 million eight-year second lien term loan was rated Caa1 and CCC+.

Another major deal last week was Paragon Offshore’s $650 million seven-year term loan. The loan was issued to partly repay its debt to holding company Noble Energy (NE). Recently, NE board members approved the spin off of Paragon Offshore. The latter also issued $1.1 billion in two tranches in senior unsecured notes last week. The details of that issue are available in Part 2 of this series.

What are leveraged loans?

Leveraged loans are issued by companies rated below investment grade. A leveraged loan is a commercial loan provided by a group of lenders. Typically secured, the loan is structured, arranged, and administered by investment and commercial banks, the arrangers—for example, JPMorgan (JPM). It’s then syndicated to other banks or institutional investors. The interest rate on leveraged loans (SNLN) is typically floating rate. It’s paid as a spread over an interest rate benchmark, such as LIBOR. Interest rates on leveraged loans are usually paid at or above LIBOR + 1.25%.

JPMorgan (JPM) is part of the S&P 100 Index (OEF) which includes other investment and commercial banks like Citigroup and Wells Fargo.

In the next section, we’ll analyze secondary market trends in the leveraged loans market. Please continue reading the next section in this series.



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