Another year, another levloans benchmark — or is it?
The pricing on a debt package for the buyout of Intertrust has been reverse flexed, with the 450bp margin on its term loan ‘B’ being cited as a new benchmark for the market. But in a market where changes in margin are so correlated with the ebb and flow of supply, the very concept of a benchmark may now be outdated.
What a difference a year makes. At the beginning of 2012, leveraged loans bankers were fretting about the lack of investors in the sector, warning that some deals might struggle to clear as transaction after transaction trundled through the market.
They predicted that a historically high margin of 550bp on term loan Bs — compared to a more typical 500bp — might be needed to push some deals through syndication.
And so it came to pass: although some deals were reverse-flexed from the heights of 550bp, the figure nonetheless became the pricing benchmark up to and including Douglas’s December signing.
But another year, another benchmark, it seems. The pricing on Intertrust’s term loan B has been shifted down to 450bp, and bankers now say that this will set the trend for the year ahead.
It is possible that the 100bp price cut reflects how much stronger the market feels today, now that the Eurozone no longer seems at risk of imminent collapse. Perhaps the prospect of a new European CLO on the horizon also helps.
But while it may be tempting to conclude that the change in pricing must be a result of improving fundamentals in the leveraged loan market, it is more likely that, now more than ever, it is simply reflective of the ebb and flow of supply.
At the moment, the lack of supply in the market is handing borrowers the whip hand in their relationship with lenders. Although no borrower is about to launch a transaction with the margin on a term loan B set at 450bp from the very beginning, you can bet some are starting to contemplate it. Even if not, they will certainly be expecting to reverse flex deals to bring them into line with Intertrust.
And with good reason. At the moment, European investors are willing to take a few hits to get their hands on what paper there is out in the market — they will accept lower margins and looser covenants.
Fundamentally, though, their appetites have not changed. The Intertrust deal may set a brief pattern for the sparsely supplied leveraged loan market over the next few months of 2013. But this is no long term benchmark. When supply picks up, so will the demands for higher margins and tighter covenants. Borrowers should not get too comfortable.