(Bloomberg) -- Banks have pulled a handful of US leveraged loans from the market this month, as investors are pushing back on aggressive pricing and credits with less favorable ratings, even though demand is outweighing the overall supply of deals.
Four companies that launched loans worth a collective $3.3 billion retreated from the broadly syndicated market in February, according to people with knowledge of the deals. Two of the transactions— a $1.21 billion loan for chemicals company WR Grace and a $773 million deal for oil field services firm US Silica — were withdrawn this past week, said the people, who asked not to be identified discussing private information.
“A lot of the recent deals have been priced on the screws with spreads compressing,” said Michael Marzouk, a loan portfolio manager at Aristotle Pacific Capital. “And with uncertainty out there with tariffs, investors are being selective.”
Managers of collateralized loan obligations — the largest buyers of leveraged loans — have had few options beyond repricings so far this year, continuing the momentum of 2024 when these type of transactions made up $942 billion of the year’s activity. But, the pulled deals show these investors won’t buy into everything.
“Its refreshing to see the market demonstrate some level of discipline and is not surprising given the recent softening of new issue break prices,” said Frank Ossino, a senior managing director and senior portfolio manager at Newfleet Asset Management. “The market is saying you need to be a well-known issuer, have a history of good operating performance, or be in a favorable industry to get the tightest pricing for a particular credit rating.”
Three of the four loans pulled out of the syndicated market this month were repricings, through which borrowers seek to cut interest rates on existing loans. Investors typically don’t like such deals as they hamper returns.
A fourth, a $575 million leveraged loan, was set to support Lakeview Farms’ acquisition of Noosa Yoghurt. Investors balked at the company’s high leverage and exposure to discretionary spending, leading the banks on the deal to place the loan privately.
“Not everything in the economy is rosy,” said David Rosenberg, Oaktree Capital Management’s head of liquid performing credit. Consumer spending is starting to struggle, and if a company pushes the envelope too far on terms like leverage, you may pull back.”
Repricing Loans
The forfeited $1.21 billion repricing offer for WR Grace, meanwhile, looked to slash the spread on an existing loan to between 2.75% and 3% over the benchmark rate from 3.25%. But the loan drew criticism because of the company’s junk B3 and B- credit ratings — both on the riskier end of the junk scale. Moody’s also highlighted environmental risks related to its Gulf Coast operations and the company’s highly leveraged balance sheet in a January report downgrading WR Grace’s ratings.
“We constantly evaluate moments to opportunistically reprice and refinance our loans to take advantage of lower interest rates,” a representative for Standard Industries, which owns WR Grace, previously told Bloomberg News. “After surveying the market, we ultimately chose to pull this offer and will act on future opportunities when it makes sense to do so.”
A group of banks also shelved a $773 million loan for US Silica that was being pitched at 4% to 4.25% over the benchmark rate. The existing debt, which supported Apollo Global Management Inc.’s buyout of the company, was priced at 4.5% in July.
“Some companies might have gone a step too far and misread the market,” said David Saitowitz, the head of US liquid credit at ICG Asset Management. “As cash levels have eased, investors can more easily pass on marginal opportunities.”
This investor push-back comes amid a general eagerness to buy floating-rate loans, which have served as a hedge against persistent inflation and higher rates over the last two years.
More than 50% of leveraged loans were trading above par last month, prompting borrowers to flood the market for a chance to reprice their debt at tighter spreads, Bloomberg News previously reported.
But, spreads in the loan market “may have found a floor,” according to Newfleet’s Ossino, given there’s a mismatch between the spreads on CLOs’ liabilities and the price of leveraged loans.
“As CLO liability spreads appear to have plateaued in the near term, it makes it difficult for managers to accept tighter loan spreads since the arbitrage would be negatively impacted,” Ossino said.
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