Repricings have been a fact of life in the bank loan market for a while, but while there's little doubt that they can be good news for the issuer, they are beginning to irk investors, who are tiring of seeing coupons slashed by more than a third, Libor floors sliced in half and pricing grids being added to deals.
"We're in a period of reprice discovery," said Randy Schwimmer, head of capital markets at Churchill Financial. "Repricings are what distinguish loans from bonds. Issuers always look to mark to market when spreads tighten, just as investors tried to improve yields when liquidity was scarce. But the market will push back if an issuer overreaches."
This year the average spread savings for issuers that have repriced their loans — including Libor floor reductions — has been 310 basis points, far more than the bank loan market has seen before, according to Standard & Poor's. Historically, that number ranged between 47 bps and 115 bps. S&P noted that this time around, however, the starting point was much higher, at an average of Libor plus 606 bps and a 3% floor.
"This activity is a reflection of the balance of power shifting from buyers to issuers due to the strong technicals in the leveraged loan market," said Kyle Jennings, a portfolio manager at Goodwin Capital Advisors. "I believe the majority of the repricing activity will be focused on the later vintage deals as most deals priced before the market meltdown have attractive rates."
A New York-based investor said, "I do not like [repricings] of course, but it's a reality and I have to live with it." He added that he will agree to a repricing as long as there's an original issue discount on which to realize gains.
So far, 2010 has been issuer-friendly, with secondary loan prices soaring and a vibrant primary market. The portion of loans trading at par or higher on the S&P/Loan Syndications and Trading Association Leveraged Loan 100 index has risen to more than 12% from 6.6% at the end of 2009 and 1.5% in June of 2009, according to S&P. That is the largest percentage since the second quarter of 2007.
"We continue to see very steady secondary volumes, growing new-issue pipeline and rising secondary prices," said Armins Rusis, global co-head of fixed income at Markit. "We are running at near-term-record primary activity."
A number of companies have taken advantage of this positive environment to refinance their bank loans with cheaper debt, and more probably will, sources said.
"Primaries have been price flexing a lot, while repricings have been picking up," a Boston-based investor said. "Both are inevitable consequences of the continued rally."
The latest repricing came straight from Florida. Last week JPMorgan arranged the repricing of $900 million term loan B for Universal City Development Partners, the owner of Universal Orlando. The company is looking to lower the coupon by 50 bps to Libor plus 375 bps and lower the Libor floor to 1.75% from 2.25%. It is offering a 50-bps consent fee to investors in exchange for a drop in the interest rate. It also is offering to add a 101 soft call protection in the first year. Consents were due last week. As of Thursday it could not be determined whether the company had secured the support it needed.
As Schwimmer said, "it's one thing to swallow lower pricing in an oversubscribed deal, but it's quite another to see your margins further shrink," because in addition to lower coupons and lower Libor floors, pricing grids, as part of the repricing wave, are beginning to irritate some investors.
A case in point is a $160 million term loan that Harvard Drug of Livonia, Mich., repriced earlier this month. The Libor-plus-450-bps coupon remained untouched, but a pricing grid was added where the coupon would step down 25 bps to Libor plus 425 bps if the senior debt-to-EBITDA ratio falls below 2.5 times.
But although these repricings can hurt, investment managers are still signing on to the deals, mainly because there's little else to choose from. Attractive secondary loans are scarce, and investment managers are frantically trying to deploy cash coming in from repayments and fund inflows.
That said, investors are also pickier and not every repricing goes through. Earlier this year investors rejected Warner Chilcott's attempt to reduce the price on a $1 billion term loan A and a $1.95 billion term loan B. The Irish pharmaceuticals company had asked lenders if it could cut the Libor floor on the term loan A by 50 basis points, to 1.75%, as well as cut pricing on the term loan B by 25 bps, to Libor plus 325 bps. In late January the company submitted the request to lenders, but soon afterward it ran into trouble when Stanfield Capital Partners and Oak Hill Advisors led a group of creditors who were calling for the rejection of the company's request. One large sticking point: the request did not include an amendment fee, which companies normally pay lenders under such circumstances. Warner Chilcott at one point offered to add a 0.125% amendment fee and soft-call protection at 101 to make the sell more attractive, according to Bloomberg. But the offer did not win lenders over.
"Investors naturally don't like [repricings], but they can always choose not to sign up for the repricing, as we saw with Warner Chilcott earlier this year," a New York banker said. "However, given investors' need to put capital to work, and how they're allocated less than what they committed to, they often have to go along with the repricing — especially for a good credit."