Junk-Grade Borrowers Cut Debt Costs Refinancing Loans (Update1)
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By Emre Peker
Dec. 11 (Bloomberg) -- Wm. Wrigley Jr. Co., the world’s largest chewing-gum maker, led speculative-grade companies refinancing high-yield, high-risk loans at lower costs this week as investors seek to deploy cash.
Cooper-Standard Holdings Inc., the bankrupt auto-parts maker co-owned by Goldman Sachs Group Inc., joined Wrigley in starting talks with lenders to cut expenses on a combined $3.68 billion of debt, according to people familiar with the talks. In the previous week, Nalco Holding Co., TRW Automotive Holdings Corp. and Landry’s Restaurants Inc. began similar discussions.
Investors injected $4.32 billion into the loan market this year, reversing two years of outflows as total returns on the S&P/LSTA U.S. Leveraged Loan 100 Index climbed to a record 48 percent, according to Lipper FMI data. The return of cash coupled with repayments from bond sales supported a price rally through the year, tightening yields and enabling companies to tap banks for cheaper loans.
“The run up in the secondary market is beginning to allow underwriters to expand their appetite to take on more risk as they become comfortable that the investor base is constructive on the new issue market,” Scott Baskind, who manages about $10 billion of bank loans at Invesco Ltd. in New York, said in an interview. “Companies that have the ability to approach the market are not only extending maturities, but also opportunistically looking to reduce their cost of capital.”
Tight Credit
The S&P/LSTA 100, which tracks the 100 largest dollar- denominated first-lien leveraged loans, climbed to a 10-week high of 85.95 cents on the dollar as of yesterday, from a record low of 59.2 cents on Dec. 17, 2008. High-yield, high-risk debt is rated below Baa3 by Moody’s Investors Service and less than BBB- by Standard & Poor’s.
As a result of the rally, the average spread to maturity narrowed to 5.12 percentage points more than the London interbank offered rate as of yesterday from a record 11.12 on Dec. 16, 2008, according to S&P’s Leveraged Commentary and Data. That means borrowers seeking a $1 billion loan now would pay about $60 million less in interest annually than last year.
“Despite the general improvement in financial conditions, credit remains tight for many borrowers,” Federal Reserve Chairman Ben S. Bernanke said this week in a speech to the Economic Club of Washington. The Fed is likely to keep interest rates, now near zero, low for an “extended period,” he said.
Record Sales
Even as banks are borrowing from the Fed at record low rates, lending to speculative-grade companies dropped 47 percent to $141.2 billion this year and is down 84 percent from the record $866.7 billion in 2007, when banks competed to finance the biggest buyouts, according to Bloomberg data.
Lenders increased interest rates on the bank debt of more than 200 U.S. companies this year as borrowers negotiated extensions and looser terms on their loans to prevent defaults amid the worst recession in seven decades, Bloomberg data shows.
Seeking to refinance debt and prevent covenant breaches, companies sold a record $149 billion of junk bonds as of yesterday, more than twice the amount sold in the same period last year, according to Bloomberg data.
“When the primary market reopened in the spring, companies took the opportunity to extend the maturity of their liabilities and rebalance their debt from loans to bonds,” Barclays Capital strategists led by Bradley Rogoff in New York wrote in the bank’s Global Credit Outlook 2010, released Dec. 4. Issuers used 75 percent of proceeds to refinance debt, they said.
Better Terms
Meanwhile, companies that tapped banks after credit markets froze following the collapse of Lehman Brothers Holdings Inc. on Sept. 15, 2008, “had to pay for those borrowings and are now standing around saying, ‘hey, wait a minute, we’re a better credit than a lot of people getting far lower rates today,’” said Tony Lopez, a partner with the law firm Clifford Chance LLP in New York who focuses on corporate finance.
“It’s simply reached a point where the refinancing gates are open,” Lopez said in a telephone interview yesterday. “Terms that are available for any given credit are so much better than what people could get a year ago.”
Chicago-based Wrigley, purchased for $22.6 billion in October 2008 by Mars Inc. in a deal backed by billionaire Warren Buffett’s Berkshire Hathaway Inc., this week asked lenders to refinance as much as $3.5 billion of bank debt with new loans that would have interest rates as much as 3.75 percentage points less than what it now pays, according to a person familiar with the terms.
Low Libor
JPMorgan Chase & Co. is arranging a three-year, $1 billion term loan with a spread of 2.75 percentage points over Libor, said the person, who declined to be identified because the terms are private. An additional five-year, $1.1 billion term loan will pay an interest rate 3 percentage points more than Libor, the person said.
Three-month Libor, a borrowing benchmark, was set at 0.2536 percent today, a record low. Wrigley currently pays 3.5 percentage points over Libor, with a 3 percent Libor floor, on one term loan used to finance the leveraged buyout, the person familiar said. Lenders have until 5 p.m. in New York on Dec. 15 to submit commitments for the new loans, the person said.
Deutsche Bank AG is arranging the new debtor-in-possession loan for Novi, Michigan-based Cooper-Standard, said a person familiar with the matter, who also declined to be named because the talks aren’t public. The automaker is seeking to refinance the $175 million loan it’s using to fund operations during a bankruptcy restructuring, the person said.
The transaction, if approved, would reduce the minimum interest rate on Cooper-Standard’s DIP loan to 8.5 percent from 12.5 percent, Bloomberg data show.
‘Massive’ Moves
“After a period of deleveraging around the turn of the year and a sustained reduction of systemic risk, we see massive price moves,” Chris Taggert, a New York-based senior loan strategist at debt-research firm CreditSights Inc., said this week in an interview, citing better investor outlooks and continued capital flows into the loan market.
Lenders will remove capital from the loan market as they seek returns in other investments such as bonds if Libor remains low and credit agreements lack “significant Libor floors,” said Scott Page, who manages about $14 billion of loan funds at Eaton Vance Corp.
“It would be foolish for deal sponsors to ask for lower spreads,” he said in an e-mail. “They already have debt capital at a cost radically below anything they ever anticipated due to low Libor, and moves to reduce costs even more would succeed mainly in making capital for new deals more scarce.”
To contact the reporter on this story: Emre Peker in New York at epeker2@bloomberg.net.
Last Updated: December 11, 2009 12:08 EST
