Push, but don't shove, in levloans
Let’s start by nipping one point in the bud: this is not a sermon on the morality of leveraged loan repricings.
In times of low issuance, it is only natural that borrowers push their advantage. But while investors should receive little sympathy if they whine about meagre returns, there should in turn be few complaints from issuers when they turn hard-nosed, when conditions turn in their favour — as they inevitably will.
All part of the ebb and flow, some might say. But let’s not forget that positive things were happening before levloan supply fell off a cliff in the second quarter.
Buy side discipline was really starting to take hold. Leveraged loan investors were taking price cuts for credits they liked, but holding firm and demanding a premium on riskier deals. In short, the market seemed to be working as it should.
’Twas not ever thus. Last year the market was locked in the usual back-and-forth tug of war: almost uniform price tightening, then, when deal flow picked up, swinging wildly to investor pushback and price widening.
Now, as borrowers hold the upper hand, with every repricing and loosening of a term sheet that comes to market, the market moves ever closer back to that dynamic.
So far, popular credits have been brought to market and lenders have been sanguine about taking the pain.
Since fresh leveraged buyout financings seem to be only just starting to appear, the temptation for borrowers to take the scythe to margins is strong. But they should exercise restraint.
Sure, no one is going to nurse grudges for very long, and in six months’ time all will most likely be forgotten.
But if the market does continue down this route, please will no one feign surprise when demand dries up and volatility up-ends the market. The resultant sour mood can last months in leveraged loan land, delaying deals and frustrating everyone.
If that does happen, borrowers will have spoilt their own party.