Competition to lend to companies below investment grade is so fierce that borrowers are demanding, and getting, more flexibility to refinance.
The shift is part of a trend toward weaker protections for lenders as investor demand for leveraged loans heats up. A healthy market is a good sign for the economy, but regulators have warned lenders to stop short of taking excessive risks.
At any point in the credit cycle, loans are easier to call than high-yield bonds, but the contrast has sharpened. Starting in 2009, as credit markets revived after the financial crisis, borrowers typically agreed not to call loans for one year unless they paid a 1% premium to face value.
Recently, however, non-call periods on loans being repriced have shrunk to just six months, and six-month call periods are showing up in some new deals as well.
"The market is hot right now," Robert Blank, managing director and counsel of Xtract Research, said in an interview. "Borrowers have used that to try to improve terms. We started to see a shift from one-year call protection to six-month call protection late last year in connection with repricing amendments."
Blank warned about six-month calls in a report in March and says the trend has accelerated.
Matthew O'Shea, an attorney and analyst with independent research firm Covenant Review, has detected the same trend and attributes it to demand for loans in a market flush with cash.
"There's so much money that what you can get done in the market today makes it possible to negotiate that call period down from a year to six months," O'Shea said.
Other protections for lenders on loans are being weakened. Covenant-lite loans, which are speculative-grade loans without financial maintenance covenants that regularly test a borrower's liquidity, equity or other indicators of financial health, have become increasingly common.
Dealogic reported on April 9 that global covenant-lite syndicated loan volume was at $29.7 billion in 2013. This was more than double the $12.2 billion over the same period in 2012. Moody's Investors Service reported that covenant protection for high-yield bonds has weakened considerably over the last several years and reached a low in March.
Data Xtract Research published this month documents the increased use of six-month call protection so far this year. In January, 8% of the new loans it examined offered six-month call protection; in April that figure rose to 31% and in the first 16 days of May it was 43%.
Year to date, 23% of loans issued had six-month call protection and 72% had the one-year call protection.
If the current trend continues, six-month call protection could soon become more common than one-year call protection, Black said in his report.
The data are only for first-lien loans sold to institutional investors. Second-lien loans usually have longer, and pricier, call protection. By comparison, for high yield bonds, call protection is usually several years.
With the pace of loan repricings continually picking up, this call protection is more likely to be triggered. It is increasingly common today to see loans repricing only after a few months.
While new deals have taken on the call protections, the feature is still more common with repricing deals and many of the notable examples of the feature have come with recent loan repricings.
Houston power provider Calpine managed to get six-month call protection on the $900 million first-lien term loan it closed earlier this month.
AMC Entertainment got six-month call protection put on its $775 million term loan that matures in 2020, which closed April 23. It priced at Libor plus 275 basis points, which was tightened from price talk of Libor plus 300 basis points. The deal was a repricing. Citigroup (NYSE:C) was the lead underwriter. The company planned to use the proceeds to refinance existing debt.
Cablevision's $2.35 billion term loan B that closed April 15 has six-month call protection, also. The loan priced at Libor plus 250 basis points, and the company planned to reprice existing debt with the proceeds. Bank of America's (BAC) Merrill Lynch unit was the lead arranger.
In early April, Hertz completed a pricing of its $1.37 billion senior secured tranche B loan facility with six-month call protection.
Sometimes loan packages can be mixed with one-year and six-month call protections. Affinia Group's new $200 million senior secured term loan B-1 expiring in 2016 was closed in early April with six-month call protection. That was part of a larger, $670 million loan package that included a new $470 million senior secured term loan B-2 expiring in 2020.
In March, Realogy put six-month call protection on its $1.92 billion term loan refinancing, and Wendy's had the feature on its $300 million term loan B refinancing.
Blank is concerned that borrowers' ability to erode call protection could be a launching pad to erode other protections for debt investors. He'd like to see lenders and investors assert themselves more.
"We'd like to think that seeing the numbers have encouraged clients and non-clients to push back," he said. "My fear would be that if lenders do not push back, the borrowers will continue to push themselves on this. You do see agreements from time to time that have no call protection at all. Our fear would be that if the borrower community is able to get six-month calls in place of one-year calls, their next push will be to do away with call protection entirely."
It's unclear whether investors are going to see it is in their interest to fight the trend to reduce call protection.
"The tide has turned away from some of these protections," said Jessica Miller Reiss, vice president and senior covenant officer with Moody's. "Whether or not investors are going to be pushing back hard on these, it depends on how the investors are going to value them."