Spanish cable firm Ono and petrochemicals company Ineos have decided to approach the leveraged loan market to raise a total €2.5bn for refinancing purposes. They couldn’t have timed it better.
The scant leveraged loan supply in the first quarter of 2012 stopped with the closure of the Iceland deal. And with no auctions at advanced stages, market participants are wondering what will keep them busy for the next couple of months.
Refinancing should be the answer, if borrowers and sponsors are astute — and quick.
Low volumes mean investors already have money to invest. And with Ineos’s refinancing of its senior loans expected to include $2.1bn of high yield bonds, and most of the new $1.5bn loan facility going to the US, loan investors in Europe will soon be flush once again.
CLO managers in particular feel the burden of cash in their pockets — they have to be invested to a certain degree or they are obliged to redistribute their funds to their top-ranked investors.
But not for long. The CLO community is shrinking by the day, as expiring reinvestment periods mean an ever smaller proportion of repayments can be pumped back into the market. If a borrower wants to take advantage of this comparatively willing and indiscriminate source of demand, now is the time.
Even ignoring the expiry of reinvestment periods, or assuming CLO managers can negotiate extensions with their investors, the loan capital base is not large enough to take too many deals, as shown by the way the market collapsed as the pipeline got busy in 2011.
Get on with it
But refinancing candidates need to get a move on. When new LBOs do come to market, investors are likely to grab the chance for some variety in their portfolio and get out of the boom-time credits they have been in for five years or more. Right now, they don’t have the luxury of making that choice.
There is pricing pressure on the timing, too. Anyone fretting about how margins are at an all-time high — with term loan Bs being launched at 550bp — would do well to bear in mind that bankers reckon they have more potential to rise, not fall, in the medium term. Pricing power is set to swing in favour of investors.
For those fortunate borrowers for whom dollars are useful, the North America market has shown itself willing to take European risk. But this could change.
Some credits in the refinancing wall are obviously doomed — nobody will touch an eight times levered business. But there are others who can buy themselves time. The leveraged loan market should provide a solution for those willing to take the plunge. The alternatives — an extortionate high yield bond at best; at worst, a painful restructuring at worst — are grim.