The massive demand for loans is prompting corporations to reprice their credits at record lows. For example, specialty chemicals company Hercules is trying to shave the spread on its $400 million term loan by 50 basis points to LIBOR plus 1 3/4%, according to Stuart Shears, v.p. and treasurer. "It's just a question of where the market is," he said. Only a few months ago, Hercules increased its term loan and cut the spread from LIBOR plus 2 1/2%. "The market has certainly come down over the last couple of months," Shears noted. Credit Suisse First Boston leads the credit.
Hercules is just one of a host of companies seeking to lock in lower interest costs. UGS Corp.'s $500 million "B" loan is being marketed by J.P. Morgan and Citibank, with the banks asking lenders for a 50 basis points reduction to LIBOR plus 2 1/4%. J.P. Morgan is also in the market with Constellation Brands to take its $345 million "A" loan to LIBOR plus 1 1/4% and the $500 million "B" loan to LIBOR plus 1 1/2%, both reportedly being lowered by 50 basis points. A UGS spokesman declined comment. Thomas Roberts, Constellation's treasurer, did not return calls.
It is not just existing credits being opportunistically repriced. Deals are also being refinanced at eye-popping levels. Union Bank of California and Goldman Sachs are leading a $400 million refinancing for Entravision Communications Corp. with price talk on the "B" loan at LIBOR plus 2%. The Spanish-language media company's credit is rated B1 by Moody's. "A single B at 200--that's pretty crazy," one loan investor noted. John DeLorenzo, Entravision's cfo, did not return calls.
The aggressive pricing may be a boon for issuers, but it is squeezing investors, especially those investing through collateralized loan obligations that raised their financing in tougher times. "We're certainly in a period now where the pendulum seems to have swung too far in one direction," a loan trader said. "It's to the level, I've got to imagine, [where] its going to start meeting some resistance."
But portfolio managers also understand why this is occurring. "We recognize that there is logic to spreads narrowing. It's not irrational. This is partly due to the fact that credit quality has improved," said one manager. "We'd like spreads to be as high as possible and narrowing makes it more difficult, but we'd rather spreads narrow than credit quality decline."
He explained that another reason spreads are narrowing is all the new entrants such as hedge funds. This supply/demand imbalance can also be seen in the secondary market where almost all loans are trading over 101. Last week credits for Foundation Coal Corp., Duane Reade and The Jean Coutu Group all broke over 101.