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Cracks Forming in Leveraged Loan Market as Another Deal Pulled

Cracks Forming in Leveraged Loan Market as Another Deal Pulled

(Bloomberg) -- The froth may not be off leveraged loans just yet, but with five deals falling through in the past few weeks, the market is definitely a little less giddy.

This time it’s Vewd Software. The streaming-service provider joins marketing firm Golden Hippo, Glass Mountain Pipeline Holdings LLC, Chief Power Finance LLC and fitness-center builder Life Time Inc. in dipping its toe in the water and finding borrowing conditions too cold.

The leveraged loan market has been a favorite of private equity firms, funding payouts to partners and buyouts of targeted companies at record-low borrowing costs for a decade, doubling in size to about $1.2 trillion. Now it’s experiencing a rare moment of sobriety. Investors who smell a recession are shying away from companies that just a few months ago might have been an easier sell.

It’s not just failed offerings that are flashing yellow caution lights. Some borrowers have come to market and had to pay more than they originally planned. The possibility of continued rate cuts by the Federal Reserve has made floating-rate deals less attractive, and companies vulnerable to trade wars have had to promise higher yields.

The market has seen “widely divergent pricing outcomes,” said Jeff Cohen, global head of leveraged finance capital markets at Credit Suisse Group AG.

DNA-testing firm Ancestry.com Inc., for example, increased the pricing of a loan financing a dividend to its private equity owners and reduced the size of the payout by $200 million.

Steep Discount

Total Safety Inc., owned by private equity firm Littlejohn & Co., priced a $367.5 million loan this month to finance its acquisition of Sprint Safety LP at a discount of 93 cents on the dollar -- one of the steepest discounts this year. It also hiked the yield on the debt to about 10%.

Cracks Forming in Leveraged Loan Market as Another Deal Pulled

Banks arranging a debt sale for the buyout of independent broker-dealer Advisor Group Inc. also had to sweeten terms. So did other private equity firms that launched loans with increasingly aggressive terms they later had to scale back.

Certainly, there have been harsher sell-offs in the risky market. Just over $28 billion of leveraged loans priced this month as bankers cranked out deals before a late summer lull. The five failed transactions amount to only $1.3 billion.

Lots of Cash

And while the appetite for lower-rated debt among managers of collateralized loan obligations will continue to be limited, according to Drew Sweeney, a managing director at TCW Group Inc., the still-expanding CLO market has plenty of cash looking for a home.

“I do think there will be demand for higher-quality paper from almost every constituent -- CLOs, retail and crossover investors,” Sweeney said.

Yet, cyclical companies could have an uphill battle selling debt with recession fears buzzing, and some bankers have found themselves wrong-footed by investors’ sudden aversion to risk.

A group of banks led by Barclays Plc and Deutsche Bank AG, for instance, held on to at least half of the $1.7 billion-equivalent of loans they arranged earlier this year for Advent International Corp.’s buyout of an Evonik Industries AG plastics division.

They’re also grappling with a shrinking buyer base following 39 straight weeks of outflows from retail funds -- the longest such run ever.

That’s left borrowers more reliant on demand from CLOs that have limits on how much lower-rated debt they can buy.

Some investors are waiting for more highly rated loans scheduled for sale after the U.S. Labor Day holiday on Sept. 2, including the $7 billion loan to help finance the merger of T-Mobile US Inc. and Sprint Corp.

To contact the reporters on this story: Kelsey Butler in New York at kbutler55@bloomberg.net;Davide Scigliuzzo in New York at dscigliuzzo2@bloomberg.net;Jeannine Amodeo in New York at jamodeo3@bloomberg.net

To contact the editors responsible for this story: Natalie Harrison at nharrison73@bloomberg.net, Bob Ivry

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