Bloomberg News

Loan Prices Rise for Second Straight Week as Outflows Moderate

October 21, 2011

Oct. 21 (Bloomberg) -- Leveraged-loan prices are poised to rise for the second straight week, climbing to the highest since August as outflows from the debt moderate and the pipeline for new-issue deals recedes.

Kinetic Concepts Inc.’s $1.63 billion term loan backing its buyout by Apax Partners Inc. rose to 99.5 cents on the dollar after being sold at 96.5 cents, according to Markit Group Ltd. Emdeon Inc.’s $1.224 billion term loan backing its buyout by Blackstone Group LP rose 3.25 cents on the dollar after being sold at 97 cents.

Prices rose as investors pulled $121 million from mutual funds that buy floating-rate bank debt for the week ended Oct. 12, according to data from EPFR Global, down from $196.7 million the previous week. The institutional term loan new-issue forward calendar shrank to about $8.1 billion as of Oct. 14, according to Barclays Plc, down from $15 billion before the Labor Day holiday in the U.S.

“The rally in the loan market has been driven by technicals,” Gil Tollinchi, head of trading at Crescent Capital Group in New York, said in a telephone interview. “Prices have been grinding higher over the last couple of weeks because you don’t have the pressure from outflows and some investors are taking the view that beyond deals already in the market there’s only modest supply in the visible pipeline.”

Loan Prices

Prices of the debt rose to 90.26 cents on the dollar yesterday, the highest since Aug. 8, according to the Standard & Poor’s/LSTA U.S. Leveraged Loan 100 index, which tracks the 100 largest dollar-denominated first-lien leveraged loans. The index has risen nine of the last 10 trading days.

Leveraged loans and high-yield bonds are ranked below Baa3 by Moody’s Investors Service and less than BBB- by S&P. Institutional loans, or term loan Bs, are sold mainly to non- bank lenders such as collateralized loan obligations, bank loan mutual funds and hedge funds.

There are about 12 loan deals containing an institutional component that are expected to come to the market, according to Barclays. Colfax Corp., the maker of pumps and valves that’s buying Charter International Plc., is seeking $1.8 billion in loans to support the acquisition, including a $900 million term loan B. 99 Cents Only Stores got a commitment for a $525 million term loan as part of the financing for its buyout by Ares Management LLC and Canada Pension Plan Investment Board.

“There’s active dialogue for new transactions but it’s unclear to the extent of timing of these deals, and whether they have been underwritten or will be done on a best-efforts basis,” Tollinchi said.

Original-Issue Discounts

The average original-issue discount needed to sell institutional first-lien loans was 96.87 cents yesterday, down from 99.4 cents in the first three months of the year, according to Standard & Poor’s Leveraged Data and Commentary.

“For the secondary loan market to attract buyers it has to be competitive with the primary market, and vice versa,” Randy Schwimmer, head of capital markets at Churchill Financial LLC, said in a telephone interview. “OIDs are the new call premium. Investors buying a loan issued at 93 have seven points of protection if the loan is repaid.”

Floating-rate debt funds have seen 12 consecutive weeks of outflows, according to Cambridge, Massachusetts-based EPFR. Over that time, there was about $6.1 billion of outflows. A record outflow of $1.88 billion was recorded the week ended Aug. 17, according to EPFR.

Kinetic LBO Financing

Wound-care company Kinetic Concepts, based in San Antonio, is paying 5.75 percentage points more than the London interbank rate on the 6.5-year loan supporting its buyout by Apax. The lending benchmark has a 1.25 percent minimum. The transaction includes a $325 million term loan C that matures in five years and pays 5.25 percent more than Libor with a 1.25 percent floor. The five-year debt was sold to investors at 97 cents, according to data compiled by Bloomberg.

Emdeon pays 5.5 percentage points more than Libor with a 1.25 percent minimum on the lending benchmark on its $1.224 billion term loan B, according to Bloomberg data. Bank of America Corp., Barclays, Citigroup Inc., Goldman Sachs Group Inc. and SunTrust Banks Inc. arranged the deal for the Nashville, Tennessee-based company.

Renaissance Learning Inc.’s $75 million second-lien term loan began trading at 99.5 cents yesterday, compared with pricing at 96 cents, while a $175 million first-lien slice, also sold to investors at 96 cents, started trading at 98.5 cents, Markit said.

Permira Buyout

The loans support the Wisconsin Rapids, Wisconsin-based learning information systems provider’s buyout by Permira Advisers LLC. RBC Capital Markets arranged the transaction, which pays 6.25 percentage points and 10.5 percentage points more than Libor on the respective first- and second-lien portions. There’s a 1.25 percent minimum on the lending benchmark.

Go Daddy Group Inc.’s $750 million term loan to support its buyout by KKR & Co., Silver Lake Partners and Technology Crossover Ventures, had risen 5.75 cents to 98.75 cents on the dollar on Oct. 17, from pricing at 93 cents on Sept. 28, according to Markit. The Barclays, Deutsche Bank AG, Royal Bank of Canada, KKR & Co. and Goldman Sachs-led financing pays 5.75 percentage points more than Libor with a 1.25 percent floor on the lending benchmark, Bloomberg data show.

“Improved sentiment over the last few sessions have investors looking at loans trading up on the break from their issued discounts, thinking, ‘Maybe we overreacted,’’ Schwimmer of Churchill Financial said. ‘‘But technicals, not fundamentals, are driving these moves.’’

--Editors: Faris Khan, Chapin Wright

To contact the reporter on this story: Krista Giovacco in New York at kgiovacco1@bloomberg.net.

To contact the editor responsible for this story: Faris Khan at fkhan33@bloomberg.net.


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