Leveraged Loan Market Shrugs Off Virus Worries With Year-End Deal Surge

(Bloomberg) -- Omicron, like delta before it, is an obstacle the leveraged loan market is ignoring, at least for now.

At least 20 loan deals totaling about $10 billion have launched so far this week, according to data compiled by Bloomberg. Meanwhile the risk-off stance created by the new Covid variant has hurt stocks and prompted six investment-grade bond issuers to delay sales, with no offerings scheduled in high-grade or junk bonds on Tuesday.

Some 80% of the new loan sales are earmarked to finance acquisitions or leveraged buyouts, bringing an increased urgency to complete them. Demand for leveraged loans is also high amid a record-breaking year of sales of collateralized loan obligations, which buy up the bulk of new loans. And the floating interest rate feature of loans makes them desirable with inflation running at its highest since 1990.

“Fundamentals are really healthy for borrowers in the loan market,” said Bill Housey, senior portfolio manager at First Trust Advisors. “Barring government lockdowns, I am not concerned with the near term outlook for loans.”

“Investors have been looking for ways to insulate their portfolios from the effects of higher rates and hence, that leads them to loans given the floating rate,” he added.

Timing also matters. Loans often market for about two weeks, and issuance needs to wrap up by mid-December before bankers and investors start their holidays. In between are two big conferences that will pull market participants away from their desks: the Opal CLO Summit Dec. 8-10 in California, and ABS East Dec. 13-15 in Florida.

One other timing push for borrowers: Some want to get loan deals done this year before the London interbank offered rate, the traditional pricing benchmark, is scrapped in 2022.

To be sure, worries that inflation may accelerate because of omicron-related disruptions hit even leveraged loans, at least in the secondary market. While trading in loans this year has outperformed other fixed-income classes, loan prices have dropped about 1/2 point in trading this week.

But borrowers continue to launch big deals. The largest is Authentic Brands Group Inc, with two loan tranches announced on Tuesday for about $2.1 billion to finance its acquisition of the Reebok shoe brand. 

Paragon Films, the maker of special films for packaging, is in the market to finance an acquisition by its third private equity firm owner in three years. The second lien tranche of its deal is expected to be rated Caa2/CCC, or eight steps into junk, a rating that some CLOs have limits on purchasing. 

“Demand is more supportive for loans right now,” said Barclays Plc credit strategist Scott Schachter. “CLO issuance was very strong in November and those CLOs remain active buyers of loans.”

Elsewhere in the credit markets:

Americas

No new investment-grade or junk bonds launched on Tuesday as omicron fears continued to roil markets.

• Athene, the insurer, has agreed to acquire a controlling stake in consumer lender Aqua Finance, its latest in a series of deals meant to help it find more unusual kinds of debt to invest in
• General Electric has set prices for its $25 billion bond buyback offer, it said in a press statement
• For deal updates, click here for the New Issue Monitor
• For more, click here for the Credit Daybook Americas

EMEA

Adler Group SA, the embattled German landlord, reported surging rents and property values in the third quarter as the company defied demands for a detailed response to allegations of fraud by short-sellers. 

• The good results weren’t enough to stave off a drop in the value of the company’s bonds, and notes due in 2029 dropped 1.7 cents on the euro to 83.7 cents, the lowest in more than a month
• Only one deal was being marketed in the European primary market on Tuesday, as action slows down heading toward the holidays
  • In the high-yield market, Reno de Medici raised the proposed yield on a 445 million-euro ($506 million) floating rate note, with pricing expected later today
• More companies are taking a catch-all approach to selling ethical debt, even though market participants say they prefer deals to be linked to specific criteria that help them judge whether targets are being met

Asia

Asia’s primary dollar bond market remained subdued on Tuesday, with just one Chinese issuer, a coal miner, looking to price debt in the U.S. currency.

• It is the latest Chinese coal company to come to the dollar bond market recently
• The deadline for investors to approve a debt swap proposed by Kaisa Group Holdings Ltd. is approaching Thursday. The struggling Chinese developer has said if it doesn’t win investor support it may consider a debt restructuring
• Ashmore Group Plc bought more bonds of China Evergrande Group or its units from July to September, according to data compiled by Bloomberg
• Indonesian companies may boost local-currency bond sales into 2022 to lock in record-low borrowing costs after the central bank said last week it’s mulling measures to absorb excess liquidity in the banking system

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