The market rallied smartly in January as concerns about Europe's sovereign debt crisis abated, and a light new-issue calendar forced investors to put money to work in the secondary market. By some accounts, spreads narrowed by an average of about 75 basis points.
Attractive financing normally would entice borrowers. Problem is, there just are not that many issuers in a position to take advantage. Thanks to last year's refinancing boom, most have already addressed their current maturities. That means leveraged buyouts and mergers and acquisitions are the primary source of new deals. And the lag time for putting these deals together means the lull in new issuance is likely to persist for a while.
"The new issue market can't react that quickly," a portfolio manager based in New York says.
He noted that it takes several months to put an LBO together, and the market volatility of August, September and October put most of this activity on hold, with dealmakers only starting to get back to work now.
That contrasts sharply with the high-yield bond market, where numerous issuers from automakers to oil and gas companies are taking advantage of cheaper financing and quicker time to market to issue new debt, often in drive-by offerings that price in a single day. And bond issuers have the advantage of being able to issue shelf registrations with the Securities and Exchange Commission; they also don't need to worry about lining up a syndicate of lenders.
The U.S. loan market moved up in more or less a straight line in January, with Markit's iBoxx USD Leveraged Loan Index returning 2.21% for the month. Markit's index of the 100 most liquid loans, meanwhile, returned 2.98%.
"It seems that loan market participants spent much of [2011] frustrated that there was significant price resistance, despite the strong fundamental story, due to external factors like European sovereign debt woes," Otis Casey, Markit's director of research, says. "With the ECB's [three-year lending] program essentially pushing sovereign credit risk issues further into the future, the loan market fundamentals have been able to assert themselves this year, prompting a rally in January that has been amazing in consistency and pace."
Those that can come to market are finding financing at very attractive levels, certainly relative to the second half of last year. In the largest new issue for the current year to date, Cequel Communications is seeking a $2.2 billion term loan B to refinance its existing, $1.9 billion in term debt.
Standard & Poor's has assigned a BB- rating to the deal and to a proposed, $500 million revolver. Cequel, which is the seventh-largest cable company in the U.S. and does business as SuddenLink, will use net proceeds from the loan offering and revolver to pay approximately $440 million in dividends.
The loan is being talked at a spread of Libor plus 325 basis points and a price of 99 cents on the dollar. One investor describes this as "relatively tight," but says Cequel is "one of those borrowers that's been in high yield forever and everyone knows." Moreover, he says, cable companies in general tend to trade well.
Another large issue in the same broad sector, $1.5 billion term loan for cellular phone tower company Crown Castle International that allocated on Jan. 25, priced at the same level, with a spread of Libor plus 325 bps and a price of 99 cents on the dollar. Crown Castle also has a double-B rating.
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