Lev borrowers rush to extend

Several issuers with legacy leveraged buyout and M&A loans raised at the height of the market in 2007 are now taking advantage of favourable conditions to extend maturities, thanks to the growing popularity of amend and extend deals among investors that remain starved of loan supply.

Issuers from 2007 such as Caesars Entertainment, Community Health and Aramark have launched deals to push 2014–2015 maturities out to 2017–2018. A&E loan volume has reached US$4.47bn so far during the first quarter.

Despite the comfortable time buffer of two to three years on their original maturities, the issuers are conscious of the market’s recent tryst with volatility.

“We don’t have to go too far back. The first half of 2011 was quite rosy and then suddenly, come August and September, you had loans clearing in the mid-to-low 90s,” a buyside source said.

The current round of extension seekers are worried that fragile economic conditions could disrupt their access to funds at acceptable prices down the road.

“Loan fund flows are marginal and it is probably a good time to address those near-term maturities to create a flatter maturity profile,” a second investor said.

Pushing back

Despite their popularity, A&E deals are not a guaranteed success with the loan investor community. Investors pushed back on Caesars’ term loan extension, forcing the issuer to spike its spread to 525bp over Libor from 450bp–475bp.

“Aramark and Community Health are offering the exact same coupon they paid in 2010 when they extended a portion of their 2007 loan to 2016–2017”

Some investors declined the A&E even at 525bp, arguing that it was not adequate compensation for a company whose non-extended tranche began paying a coupon of 300bp over Libor about four years ago but that was then accompanied by a higher 4.71% three-month Libor rate. Taking today’s sharply reduced 0.54% Libor rate into account, Caesars is paying 192bp less.

Aramark’s recent extension proposal comes with a coupon increase to 325bp over Libor, a hike of 112.5bp from its original January 2007 deal, but a net 370bp reduction in overall yield as a result of the Libor rate falling from 5.36% when the original deal was struck.

“Aramark and Community Health are offering the exact same coupon they paid in 2010 when they extended a portion of their 2007 loan to 2016–2017,” a banker said. “They’re basically saying that the embedded market risk as well as credit risk today is unchanged from 2010, and that is very likely not true.”

Questions have been raised as to why investors agreeing to A&Es have not made strong demands for staple yield enhancers such as Libor floors and discounts. The conclusion boils down to demand for loans exceeding supply.

Moreover, a growing proportion of CLO investors, who cannot buy long-tenor loans as a result of maturity constraints in their indentures, find four-year to five-year A&E loans a practical way to stay invested in the market.

“If I were to issue a refi loan that matures in 2018, I’d have to pay market rates inclusive of a sufficient Libor floor and an OID,” an investor said. “Effectively, a loan extended to 2017–2018 could have the same maturity profile but pay far less. I’d rather go into the refi.”