Leveraged Loan Onslaught Is Starting to Face Investor Pushback

(Bloomberg) -- U.S. leveraged loan investors are starting to push back against companies that are trying to borrow outsized amounts of money at some of the most aggressive terms ever seen.     

Midcoast East Texas, a natural gas pipeline and transport business, has postponed a $400 million leveraged loan sale. Teaching Strategies, a provider of curriculums and software for educators, had to offer higher interest on Tuesday for a $320 million leveraged-buyout loan it is selling.

Accounting firm EisnerAmper improved investor protections known as covenants on a $400 million loan for its leveraged buyout. And Cooke Inc., a fish farming company, has missed its expected pricing date, usually a sign of relatively weak demand. 

These hiccups don’t yet represent a dramatic shift. Covenants are still the weakest ever on average, according to a Covenant Review index for August. But investor resistance does signal that money managers can only be pushed so far, and future loans might be harder for companies to sell. 

“There has been pushback on some of the very aggressive covenant packages for loans that otherwise aren’t attracting strong demand in the market, but those packages usually still end up aggressive,” said Scott Macklin, director of leveraged loans at AllianceBernstein.

The pushback comes as companies try to sell heavy volumes of leveraged loans, with the market on track for one of the busiest Augusts on record. New money financings, those backing acquisitions and dividends, swelled to more than $40 billion in June and July, the first back-to-back months at that level since Bloomberg began tracking syndicated leveraged loan data in 2013. 

The next few months are likely to be active as well, with billions of dollars of loans queued up in the pipeline.  

“There’s been so much issuance, record levels, that there’s some deal fatigue developing,” said Roberta Goss, co-head of the bank loan and CLO Platform at asset manager Pretium Partners. “Earlier in the year, you’d put a loan out there and it would be oversubscribed in 24 hours. That’s not happening anymore.”

The pushback isn’t happening on every transaction, Goss added. And it’s not always affecting pricing. 

Specialty chemical company W.R. Grace, for example, last week cut the size of its acquisition loan to $1.25 billion from $1.45 billion, and improved some of its covenants for investors, but also got better pricing on the loan in the end, selling it at 99.75 cents on the dollar instead of the 99 cents to 99.5 cents range it had previously discussed. 

And biopharmaceutical outsourcing services company Parexel improved covenants on a $2.7 billion LBO term loan priced last week to gain more investor interest, but still paid interest at the low end of the range it gave. The borrower sweetened the so-called most-favored-nation clause intended to keep the current loan pricing similar to any raised in the future, and it reduced its ability to freely make investments and dividends, among other changes.

U.S.

A handful of companies, including Public Service Electric and Gas, were selling bonds in the U.S. high-grade primary market on Tuesday. 

• Nearly $2 billion of bond sales are on deck in the high-yield market as companies look to borrow before the Labor Day holiday
• SeaWorld Parks & Entertainment’s newly minted $725 million bonds are among the biggest decliners in the U.S. high-yield market on Tuesday
• There were zero large bankruptcy filings in the U.S. last week, putting this month in line for the fewest big insolvencies in any August since at least 2008

Europe

The region’s first euro deals in nearly a week are coming from ultra-safe borrowers Berlin Hyp AG and Germany’s State of Hesse.

• The number of U.S. firms issuing euro-denominated bonds is expected to rise in the coming months, ING strategists write in a note; they say a lack of direct support from the Fed relative to the ECB’s corporate bond purchases is spurring a widening gap between dollar and euro spreads, which “opens up more cost-saving advantages for U.S. corporates to issue in euro”

Asia

Bonds of China Evergrande Group fell sharply Tuesday as its founder stepped down as chairman of its main onshore unit Hengda Real Estate.

• Deal flow in Asia’s dollar bond market ran dry on Tuesday, although mandates from internet search giant Baidu Inc. and two other Chinese borrowers suggest a smattering of deals will emerge in the coming days
• More than $59 billion of Chinese firms’ dollar bonds are yielding more than 15%

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