refinancing out of the term loan B deals in the institutional marketplace into term loan A bank deals. For
example, a BB profile borrower can currently refinance
a term loan B priced in the LIBOR+ 4.5% range with
a 1.50% floor into a term loan A at LIBOR+ 2.5% -3%
with no LIBOR floor, with a front-end fee of less than
1%. Recently, Newport Corporation raised a $185
million term loan A for acquisition financing. The deal
was sizeable enough to have been executed in the institutional market, but the issuer opted for a bank deal.
Bank ABL players are by far the biggest in the
marketplace. With their low cost of funds and ability
to cross-sell, they compete comfortably in the lower
priced deals. Banks are also willing to increase hold
sizes, in some cases committing as much as two times
what other lenders are willing to hold, further grabbing market share. However, while some banks are
more willing to decrease pricing or increase hold sizes,
banking sources say they are less willing to give up on
structure. Asset-based lending has become a product
in some banks that also have investment banking
arms. In some larger multi-tranche deals, the investment bankers will be tempted to push aggressive ABL
pricing down the throats of their ABL brethren in order
to please the client.
This year, term loan A volume has grown significantly
as a share of middle-market sponsored issuance. In
Q3/11, term loan A deals made up approximately 42%
of sponsored deals compared to just 17% in Q1/11.
In contrast, institutional volume as a percentage of
sponsored issuance has fallen by roughly half over the
same period. In Q3/11, middle-market institutional
deals made up 30% of sponsored issuance versus
nearly 60% in Q1/11.
An additional driver of the relaxation of pricing and
terms in the sponsor finance marketplace is that 50%
of deals in 2011 were add-ons, up from 44% in 2009.
Add-on financings are a much easier sell to bankers’
credit committees.
At a recent financing conference in New York, one
panelist remarked that it’s not a smooth curve between
bank-only deals and hybrid deals. I think what he meant
was that it may be easy to go from a term loan B deal
to a term loan A deal, but not the other way around.
One subtle element in the ABL pricing wars is that
for lenders, the decrease in spreads may not fully
impact their P&Ls for two to three years, so the full
effect of low pricing is not immediately felt. With the
current low interest rates, giving up 100 basis points
due to refinancing pressure can have a big impact on
the profitability of a loan.
As we all know, pricing is a function of risk. In June
2007, the expected default rate on leveraged loans
fell to an all-time low of 0.15%. This expected default
rate climbed to 10.8% in November 2009. Today, the
expected default rate is near its all-time low, hitting
0.17% in November 2011, according to the LCD team
at Standard & Poor’s Capital IQ. With the headlines
dominated by news of China’s slowdown, continued
European problems, Washington gridlock and insol-
vent state and municipal pension plans, the expected
default rate may appear optimistic. Not so long ago,
the phrase “Greek and Italian ruins” brought to mind
travel plans, rather than the health of the Greek and
Italian banks today.
Protecting assets & collateral with igh level expertise.
For more than 20 years, Freed Maxick
has assisted lenders in making
informed decisions, through:
- Collateral analysis
- Fraud & forensic analysis
- Portfolio due diligence
- Pre-loan surveys
- Quality of earnings studies
- Rotational inspections
- Takeover exams
FREED MAXICK ABL SERVICES, LLC
