Tags: Corporations | Double | Down | On | Loans | to | Avoid

Corporations Double Down On Loans to Avoid Defaults

Wednesday, 24 November 2010 10:50 AM

Speculative-grade U.S. companies are doubling the amount of money they raise in leveraged loans to refinance debt, taking advantage of dropping costs to level a maturity wall that threatened a surge in defaults.

Swift Corp., the largest truckload carrier in North America, is leading transactions slated to repay borrowings this week as refinancing-related issuance climbs to $77.6 billion from $37.3 billion in all of 2009, according to Standard & Poor’s Leveraged Commentary and Data.

Investors are asking for lower risk premiums on loans rated four to five steps below investment grade, S&P LCD data show, as revised figures show the U.S. economy expanded at a faster pace in the third quarter and the Federal Reserve renewed efforts to boost growth and reduce unemployment. Since the beginning of 2009, companies tapping lender appetite refinanced 37 percent of loans maturing through 2014, when the maturity wall peaks at $204 billion, according to Bank of America Merrill Lynch.

“We’re going to see a lot of refinancing, people will attack the maturity wall of 2014, the big challenge will be for some of the major issuers with $5 billion to $15 billion of bank debt that’s trading in the market for 70 cents to 80 cents,” said Kevin Booth, portfolio manager of RS Investments’ $250 million floating-rate fund. “Treasurers have pretty much squared away 2011, 2012 and 2013 maturities.”

Companies have $120.4 billion of leveraged loans, which are rated below Baa3 by Moody’s Investors Service and BBB- by S&P, coming due through 2013, down from $293.8 billion at the end of 2008, Bank of America Merrill Lynch data show.

Tighter Spreads

Leveraged-loan default rates in the U.S. dropped to 3.6 percent in October from 4.1 percent in September and 11.5 percent last year, Moody’s said in a Nov. 4 report. There were no defaults in October, Moody’s said.

Pricing for debt rated B+ or B declined to 6.2 percentage points as of today from this year’s peak of 7.56 percentage points in July, S&P LCD said. The average all-in spreads assume three-year maturity on loans and include upfront fees, original- issue discounts and floors on the London interbank offered rate, a lending benchmark.

“Spreads are tightening because of demand,” said Tim Donahue, head of high-yield and leveraged-loan capital markets at JPMorgan Chase & Co. in New York. “The key driver here is technical, there’s a lot of cash in the loan market. As people get scared with QE2 coming on and inflation fears stoke up, the best place to be protected is a floating-rate market, it’s a natural place to be and that drives the flow of funds to the loan market.”

Fed’s QE2

U.S. gross domestic product rose by 2.5 percent in the three months ended Sept. 30, compared with a 2 percent estimate issued last month and 1.7 percent growth in the second quarter, the Commerce Department said yesterday. Jobless claims declined to 407,000 for the week ended Nov. 20, the lowest level since July 2008, the Labor Department said today.

Fed members pushing for a second round of quantitative easing, or more monetary stimulus, overcame concerns by a minority of central bankers concerned about inflation in deciding to buy $600 billion of Treasuries, according to the minutes of the officials’ Nov. 2-3 meeting. The move has been criticized by Republican politicians, governments around the world and some economists.

“An unintended consequence of the Fed policy will be rising inflationary expectations and higher long-term yields,” said RS Investments’ Booth, who previously was co-head of the high-yield team and helped run the leveraged finance business at BlackRock Inc. “That would make the high-yield bond market less compelling and perhaps drive investors to the leveraged-loan market, which in turn will help companies access the market to refinance debt.”

Swift Refinancing

Swift, acquired for $2.6 billion by founder Jerry Moyes, is seeking to raise $1.45 billion of loans and about $1 billion in an initial public offering to refinance $2.53 billion of debt, mostly used to back the Phoenix-based company’s takeover.

Bank of America Corp., Morgan Stanley and Wells Fargo & Co. will arrange a $400 million revolving credit line due in five years and a $1.05 billion term loan maturing in six years. The banks will hold a lender meeting Nov. 30.

Companies also have been able to take advantage of investor demand for leveraged loans even as markets sank on renewed investor concern that contagion is spreading through the euro zone while Ireland seeks a bailout and fighting broke out between North and South Korea.

Lower Volatility

Lower volatility in loan prices compared with the high- yield bond and the equity markets enabled companies to seek amendments that would push out existing debt maturities and give borrowers more time to refinance debt.

Junk bonds lost 1.64 percent since total returns peaked Nov. 9, paring 2010 gains to 13.7 percent, Bank of America Merrill Lynch’s US High Yield Master II Index shows. During the same period the S&P 500 Index lost 2.6 percent, bringing down gains for the year to 7.8 percent, while the S&P/LSTA US Leveraged Loan 100 Index retreated 0.65 percent to overtake equity returns with 7.95 percent.

Three factors contributing to more stable prices in the leveraged-loan market is less liquidity than bonds and equities; interest rates tied to lending benchmarks, therefore rising with inflation; and lack of call protection, which enables borrowers to refinance the debt at par at their choosing, JPMorgan’s Donahue said.

“We don’t see the technicals of the market changing dramatically and we think we’ll continue to see amend-extends because demand for paper will continue to outstrip supply,” he said.

‘Favorable Market Conditions’

CDW Corp., the technology solutions provider taken private by Madison Dearborn Partners LLC in 2007, is seeking to delay maturities on $1 billion of loans used for the leveraged buyout at a higher interest rate.

JPMorgan, Deutsche Bank AG and Morgan Stanley are arranging an amendment that would push out the due date in exchange for a 1 percentage point increase in interest on the extended portion to 5 percentage points more than Libor, the rate banks charge to lend to each other.

CDW is seeking to move the maturity on a portion of the debt by 2.5 years to July 2017, according to a Nov. 22 regulatory filing. The Vernon Hills, Illinois-based company said it’s also seeking lender permission to issue $300 million of senior secured notes to repay its term loan at par.

“We are pursuing this transaction now due to favorable market conditions,” Chief Financial Officer Ann Ziegler said in an e-mail yesterday.

© Copyright 2018 Bloomberg News. All rights reserved.

1Like our page
Speculative-grade U.S. companies are doubling the amount of money they raise in leveraged loans to refinance debt, taking advantage of dropping costs to level a maturity wall that threatened a surge in defaults.Swift Corp., the largest truckload carrier in North America, is...
Wednesday, 24 November 2010 10:50 AM
Newsmax Media, Inc.

Newsmax, Moneynews, Newsmax Health, and Independent. American. are registered trademarks of Newsmax Media, Inc. Newsmax TV, and Newsmax World are trademarks of Newsmax Media, Inc.

© Newsmax Media, Inc.
All Rights Reserved