February 8, 2017
Written by JD Naujeer – Dealogic Research
A borrower’s market
For more than 4 years, interest rates have not crossed the 1% threshold. They currently stand at 0% from the European Central Bank, 0.25% from the Bank of England, and 0.75% from the US Federal Reserve. Accordingly, the search for higher yield in alternative asset classes has contributed to excess liquidity in the Loans Market. These factors, coupled with dwindling new-deal activity such as M&A financings, have led to favorable conditions for borrowers keen to reprice existing loans.
Implications for the US and European Leveraged Loans Market
Leveraged-loan repricing volumes from US and European borrowers surged in 2016 to total $178.3bn — up 162% from the previous year. So far this year, $37.1bn (via 26 deals) have been repriced across the US and Europe, marking the second highest YTD volume on record. The upwards trend is set to continue in 2017, with announced repricings currently at $75.9bn (via 70 deals).
Slashed margins contribute to US repricing growth
The average margin of US institutional loans in 2016 stood at 463bps, a 4.5% (22bps) decrease from 2015. On average, BBs, Bs, and CCCs enjoyed a lower margin on institutional loans, which helped to boost the latest wave of leveraged-loan repricings.
Among those already seen this year, Petco Holdings decreased margins a second time on its $2.5bn term loan B (TLB). Originally priced in January 2016 at 475bps (for $1.8bn) and 500 bps (for $700m) across two tranches, the loan saw margins lowered last June to 400bps and 425bps respectively, then lowered again to 325bps after consolidating into a single tranche. The wave also includes Jacobs Douwe Egberts’ repricing last year. Margins on its USD-denominated institutional tranches fell by 100bps from June 2014, when the loan was orignally signed.
Data source: Dealogic, as of February 7, 2017