Repricings line up in US leveraged loan market as investor demand returns

U.S. leveraged loan repricings are back at the forefront of the $1.2 trillion market after a long hiatus, as strong investor demand has created a window of opportunity for issuers of riskier debt. Thus far in January repricing volume has shot to $38.7 billion from 26 transactions, according to LCD, after just a handful of such deals were completed in the prior 10 months.

On average, these deals are cutting 69 basis points off the Libor spread, or 84 bps off spread and floor combined. Out of 26 deals, 14 are cutting the Libor floor by 25 bps. Only three deals are in the BB- or higher category, and the rest fall into the single-B rating bracket, with 11 having a B- corporate rating on at least one side.

With a Libor floor, a predetermined spread kicks in should actual Libor drop below a specified level.

Some of these price cuts have been significant. Eleven deals have shaved at least 100 bps across the spread and floor, and there are several others now in market looking to do the same.

This repricing resurgence is backed by a strong supply/demand tailwind that has led to a sharp rally in the secondary market to start the new year. The average bid of the S&P/LSTA Leveraged Loan Index hit 97.49 as of Jan. 21, which has not only erased the fallout from the onset of the pandemic, but marks the highest level since May 5, 2019. Moreover, the share of loans bid at par or higher is at about 50%, up from 12.5% at the end of December.

Based on current clearing levels, the repricing wave may have room to run. Consider that the total amount of loans from B and B+ rated issuers priced at par or higher with a spread of L+400 or higher, in which the call protection was rolled, is $62 billion (as of Jan. 19). Another $33.1 billion will see prepayment fees expire in 2021. Of the 12 issuers rated B or B+ that launched a repricing in January, eight had spreads below L+400.

It should be noted the average new-issue spread for issuers in this rating profile has dropped to L+361, the lowest it has been since January 2020 — notably a month that registered the second-largest repricing volume on record, at $94.2 billion. In fact, the average for this cohort remained well over L+400 for much of last year, hence some issues placed in 2020 have emerged in this repricing wave. In fact, American Bath Group LLC and KIK Custom Products Inc. are returning to market after having placed their loans as recently as November and December and are paying the 1% call premium to do it.

After widening the net to include all outstanding loans from B/B+ issuers that now have a spread higher than the current average clearing level (L+375 or higher) and are priced at par or higher, that potential repricing volume grows to $127.8 billion, including loans with call protection expiring in 2021.

For issuers with ratings of BB/BB-, the current average new issue spread is L+231. Looking at outstanding loans bid at par or higher, there is about $33.4 billion outstanding with an existing spread of at least L+250.

Clearly, investor demand is outpacing supply to start the new year, leading to the upswing in opportunistic activity. The new-issue collateralized loan obligation pipeline is heating up, and retail investors have poured about $2.5 billion into loan mutual funds and exchange-traded funds over the two weeks ended Jan. 20, marking some of the heaviest inflow numbers for these funds in over four years.

For some perspective, new-issue supply from deals supporting leveraged buyouts and M&A has been decent to start the year. The month-to-date tally of $14.1 billion is right on the $14.7 billion average of the final three months of 2020, and there is more to come soon, with large deals rolling out this week from Foundation Building Materials LLC, NielsenIQ, and TricorBraun Inc. What has come to market already is, predictably, performing well, with prices flexing during syndication in the issuers' favor. Looking at total new-issue volume, LCD has tracked $27.3 billion of loans launched so far in January, lagging the $36.2 billion repricing total (excluding re-syndicated repricings which are captured in the new-issue tally). The last time repricings outpaced new-money loans was in January 2020, by the same ratio of 1.3 to 1, although in absolute terms both figures were more than twice as high ($83.5 billion/$64.7 billion).