Leveraged Loan Buyers Hope for More New Deals After April

(Bloomberg) -- Issuance of leveraged loans in the U.S. cooled a bit in April with both new money transactions and repricings tapering off. Cash-rich investors are hoping that deal flow tied to takeovers will pick up as there is less uncertainty on tax reforms and equity valuations temper.

"I wouldn’t be surprised to see M&A accelerate following tax reform clarity and policy clarity," said Matthew Daly, head of credit research at Conning, which manages $121 billion in assets. And if there were a modest sell-off in equities, "we could hit a sweet spot where M&A picks up."

There are signs that new money issuance will pick up, with the loan pipeline growing to $29 billion from $17 billion at the end of March. This includes $8 billion of term loans that will finance Blackstone Group’s buyout of a unit of Thomson Reuters, Federal Mogul’s $2.4 billion term loan for its takeover by Tenneco and $5.1 billion of loans for Stars Group’s purchase of Sky Betting & Gaming.

Issuance of new money leveraged loans -- deals backing mergers, buyouts and dividends -- declined to $26.42 billion in April from $31.6 billion in March, according to data compiled by Bloomberg. For the year so far, new money issuance softened to $111.4 billion from $122.1 billion in the same period in 2017.

"M&A will pick up," Fred Orlan, global fixed income head at Jefferies Group, said this week at the Milken Global Conference in Beverly Hills. With the easing of leveraged lending guidance, LBOs will become easier for financial sponsors.

However, "I don’t expect to see large LBOs,” Orlan said. “But it’s easier to do now."

Leverage on new loans has been steadily climbing. U.S. LBO leverage has risen to 6.4 times so far in 2018, from 6.2 times last year and 5.9 times in 2016, according to Fitch Ratings.

On a brighter note for loan investors, repricings slowed as well in April. So many issuers have slashed their spreads in the past 18 months that eligible candidates for loan price cuts have shrunk.

Repricing launches dropped to $47.1 billion in April from $61.5 billion in March, a bigger decline than the fall in new money deals. Even then, some of the biggest deals this month were repricings. This includes a $4.96 billion loan for Avolon, which is the largest U.S. institutional term loan to seek a post-crisis low pricing of Libor+175.

©2018 Bloomberg L.P.

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