Loan Prices Reach 20-Month High as Interest Costs Dip (Update3)
March 12, 2010, 5:11 PM EST(Updates loan index price in the second paragraph.)
By Richard Bravo
March 12 (Bloomberg) -- The high-yield, high-risk leveraged loan market reached a more than 20-month high as companies, such as Fresenius SE, reduced minimum interest-rate floors to ensure a minimum return on new deals.
Prices on the Standard & Poor’s/LSTA U.S. Leveraged Loan 100 Index, which tracks the 100 largest dollar-denominated first-lien leveraged loans, ended at 90.23 cents on the dollar today, the highest since July 7, 2008, when it closed at 90.32 cents. The index’s total return was 2.9 percent for the year as of today.
The average minimum London interbank offered rate written into credit agreements, guaranteeing investors a certain interest rate, decreased as the loan market rebounded. These so- called Libor floors fell to an average of 232 basis points this year, down from an average of 279 basis points during 2009, according to data compiled by Bloomberg.
“This year we’ve seen Libor floors going below 2 percent and as low as 1.5 percent,” David Nadelman, co-head of Syndicate, Americas at RBS Securities in New York, said in a telephone interview. “The market is heating up enough that arrangers are finding that they don’t need to rely on the Libor floor as much as a yield enhancer to get participants in deals.”
Fresenius Loan
Fresenius, the world’s biggest provider of dialysis services, this week cut the lending floor on $1.2 billion in term loans to 1.5 percent from 3.25 percent, the Bad-Homburg, Germany-based company said in an e-mailed news release today. The lower floor on Libor, the rate banks charge to lend to each other, may reduce interest by $21 million in the coming year.
The interest rate was also reduced to 3 percentage points more than Libor, down from 3.5 percentage points over Libor, according to the release.
The floor ensures that lenders will receive a minimum for Libor even if the rate, which banks charge to lend to each other, remains around record lows.
Investors are also speculating that Libor is set to rise, which would eliminate the need for an artificial minimum. Market participants are betting that the three-month forward Libor curve will reach 1.94 percent by Sept. 16, 2011, and 3.11 percent by Sept. 17, 2012, according to data compiled by Bloomberg. Three-month Libor is 0.26 percent.
New Deals
A lack of new deals in the primary loan market also helped drive demand in the secondary market, pushing up loan prices, as well as demand for new issues. This year, $41.4 billion of leveraged loans have been arranged in the primary market, according to data compiled by Bloomberg. While that number is up from the $15.6 billion arranged over the same period last year, it’s down from the $192 billion that came to market during the similar period in 2007.
“We don’t have enough primary issuance,” RBS’s Nadelman said. “Funds are sitting on a lot of cash and they want to put it to work. As long as a deal is a quality credit and the yield is competitive, investors are going to jump in.”
Pierre Foods Inc., the Cincinnati-based maker of precooked meats and ready-to-eat sandwiches controlled by Oaktree Capital Management LLC, increased the size of a term loan earlier this month and cut the discount at which the debt was sold, according to a person familiar with the deal.
Pierre Foods Payments
Deutsche Bank AG and Credit Suisse Group AG arranged the $275 million six-year loan that pays an interest rate 5 percentage points more than Libor, with a 2 percent Libor floor, the person said, who declined to be identified because the transaction is private.
Prices in the secondary loan market have received a boost from reduced concerns that countries, such as Greece, might default and impact other credits, said Christopher Garman, chief executive officer of Garman Research LLC in Orinda, California.
“With sovereign risk being pushed to the sidelines, the leveraged-loan market has gone back to the business of corporate risk, and it likes what it sees,” Garman said.
First-time jobless benefit applications dropped for the second week by 6,000 to 462,000 in the week ended March 6, Labor Department figures showed yesterday in Washington.
The trade deficit in the U.S. unexpectedly narrowed 6.6 percent to $37.3 billion from a revised $39.9 billion in December, Commerce Department figures showed yesterday in Washington.
--With assistance from Emre Peker in New York and Courtney Schlisserman and Shobhana Chandra in Washington. Editors: Michael Weiss, Richard Bedard
To contact the reporter on this story: Richard Bravo in New York at rbravo5@bloomberg.net.
To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net.
