Borrowers are taking advantage of demand for loans to reprice deals they originally brought to market as recently as a few months ago.
Coupon spreads on new issues have narrowed considerably since the early summer, leaving some issuers who came to market before then with a sense of buyer's remorse. Repricing a loan can be likened to returning to a department store with an item purchased before it went on sale and demanding a refund of the price reduction.
"CLOs [collateralized loan obligations] and retail funds both have cash to put to work, investors are in search for yield, … that general pressure has allowed issuers, even those who have been to market earlier this year, to come back to market and reprice their loans 50-75 bps tighter than before," said Darin Schmalz, an analyst at Fitch Ratings.
Schmalz said negotiating a lower interest rate with existing lenders is typically both less expensive and less time consuming than obtaining a new loan from a new group of lenders.
"While we've seen a marginal reduction in interest expense for issuers (right now), 12 months down the line is when you'll start really seeing the benefits of a decrease in spreads" from the cumulative savings, he said.
National Mentor is currently negotiating with lenders to both upsize and reprice a $530 million term loan it obtained in February 2011, according to ratings agency reports. The company, which is currently paying interest of Libor plus 525 bps, wants to lower the rate by between 25 bps and 50 bps, to Libor plus 475-500 bps, according to Standard & Poor's. The Libor floor will also be reduced, by 50 basis points, to 1.25% from 1.75%.
S&P expects the changes to reduce National Mentor's interest expense by about $5 million annually.
The rating agency said the loan is also being upsized by $20 million to $550 million.
It said proposed changes have "no significant effect" on National Mentor's credit measures, as the cushions on debt covenants will remain comfortably above 10%. S&P has a B rating on the company and a B+ rating on the loan.
Moody's Investors Service published research calling the proposed repricing "credit positive," but it left its ratings on the term loan at B1.
On Oct. 2, GNC Holdings said it had completed the repricing of its $1.1 billion term loan. Under the new terms, the loan bears interest at Libor plus 100 bps and a margin of 275 bps. Previously, the loan paid interest of Libor plus 125 bps and a margin of 300 bps.
Lenders will receive a 1% premium if the company consummates another repricing within one year. All other terms remain unchanged.
GNC, based in Pittsburgh, is a retailer of nutritional products. It is rated BB by S&P.
The latest transaction comes just one month after GNC increased the size of its term loan B by $200 million to $1.1 billion. S&P said in August it expected GNC to use proceeds to partially fund a previously announced $300 million share repurchase program
No fewer than 13 repricing efforts were launched over the five trading days ended Sept. 28, according to research published that day by Barclays. In addition to National Mentor and GNC, they included a $315 million loan issued by Roofing Supply, a $300 million loan from Rocket Software, a $1.62 million loan from Zayo, a $1.3 billion loan from Valeant, a $350 million loan from Tank Holding, a $950 million loan from Rexnord, a $1.2 billion deal for Level 3, a $250 deal for Harron Comm., Terex's $452 million loan, Saver's $725 million loan, Royalty Pharma's $2.7 billion deal, and Camp Systems' $245 million deal.
In addition to the fact that the original loans all had coupons spreads well above current new issue levels, after accounting for Libor floors, there are several things the deals being repriced have in common, according to Barclays. First, the vast majority of issuers have private equity sponsors;
Second, the original loans were of relatively recent vintage. Barclays didn't comment on this characteristic, but presumably there's less temptation to refinance recent-vintage loans, as opposed to reprice them, since the maturities are still relatively far off.
Third, the issuers are all relatively high-quality, for subinvestment grade, carrying credit ratings of B1 or higher.
Based on these criteria, Barclays identified a number of other potential candidates for repricing, including an $840 million loan issued by Academy Sports in July 2011; a $550 million loan issued by Arizona Chemical Co. in December 2011; two Asurion Corp. loans, a $2.2 billion first-lien and a $1.27 billion second-lien, both issued in May 2011; and a $1.44 billion loan issued by Emergency Medical Services in May 2011.
Why reprice a loan when it can be refinanced? Fitch's Schmalz said repricing allows issuers to work off of existing loan documents and retain the same group of lenders. Typically, they just have to pay a small amendment fee. By comparison, a refinancing involves soliciting all new lenders. "It's more expensive and it takes longer," he said.
Timing can be a key issue. "Over the last couple of years, the market has been very fickle; it can tighten really quickly given macro events around world," Schmalz said.
"We saw this in early ‘11, late ‘11, and the second quarter of this year. With the fiscal cliff issue, an election year, a slow growth economy, slow growth in China … there are a host of factors that can cause markets to panic. Issuers are opportunistic, they're locking in these favorable rates, because spreads could increase or the market could close.”
