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Trlpc euro denominated leveraged loans cheaper than dollars


Feb 25 Global borrowers are using cheaper pricing in the European leveraged loan market to increase the size of euro-denominated tranches and push pricing down on more expensive dollar tranches as companies arbitrage the Transatlantic markets to secure best pricing on large liquid loans. Companies with international operations typically tap the dollar and euro markets simultaneously and play them off against each other to get the lowest pricing possible. Dollars have historically been cheaper than euro-denominated loans, but a repricing in the US market in late 2014 as US regulators put the brake on aggressive loans, means that euros are cheaper."Europe has been more aggressive and this has definitely helped US bankers secure tighter pricing on cross border deals. There was the assumption that you used the dollar market to beat up the euro market but recent deals have seen a reversal and it's the euros which are now beating up the dollars," a European banker said. Austrian packaging group Constantia Flexibles narrowed pricing this week for the second time on its dual-denominated leveraged loan financing backing its buyout by French investment firm Wendel. Constantia's buyout loan double reverse flexed to 375bp on the dollar and euro tranche, having been initially guided at 425bp-450bp. It is unlikely the deal would have priced at 375bp if it was a pure dollar deal, bankers said."There has been a widening in the US so borrowers are looking to raise euros, it is a temporary pricing arbitrage that borrowers are trying to take advantage of. The euros are also dragging the dollars lower, too. It is a short term gain because euros are not as liquid," a second European loan banker said.

Constantia also increased the size of its euro tranche by 100 million euros ($113.55 million), reducing the dollar tranche by the same amount after stronger appetite for the euro portion."A company is actually incentivised to do transactions in euros, and this is the first time in a long time that has happened," said Sandeep Desai, co-head of US leveraged loan capital markets at Deutsche Bank.

EURO BENEFITS Last month, an 841 million euro-equivalent leveraged loan backing telecoms group Altice's acquisition of Grupo Oi's Portuguese operations closed with tighter pricing than initially anticipated. A $500 million tranche was expected to price wider than a 400 million euro tranche and was launched at 500bp-525bp compared to 475bp-500bp, respectively. After being flexed, both the euros and dollars closed at 425bp, with a 1 percent floor. The euro loan came in slightly tighter with a 99.5 OID compared to 99 OID on the dollar loan but ultimately, pricing on the dollar loan was far lower than originally expected, bankers said. The relative strength of the European market versus the US market was also outlined by Dutch software company Exact's $495 million dual-denominated loan backing its buyout by private equity firm Apax Partners.

Some 100 million euros of a $335 million first lien tranche allocated earlier this month but the dollar term loan was put on hold this week after the syndication process faced difficulties. European borrowers have traditionally gone to the US to drive pricing tension, whereas US borrowers have come to Europe to match euro-denominated cashflows. However, Europe's low borrowing rates are making it more appealing for US companies to issue loans in euros, as a tighter US monetary policy will push interest rates up, while quantitative easing in Europe suggests rates will stay low for some time."There is strong potential for this trend to continue as the Federal Reserve looks to tighten policy while the (European Central Bank) steps up extraordinary easing measures," said Benjamin Garber, an economist at Moody's Investors Service. More advantageous pricing and execution in Europe could even see US companies with a global reach pursue a transaction solely denominated in euros."We have not seen that yet, but we feel that is something the market has enough of an appetite to sustain," Desai said. Should this happen, cash-rich European investors are expected to have an enough appetite as the pipeline of new leveraged loans is drying up in Europe, bankers said. ($1 = 0.8807 euros)

Trlpc us leveraged loans struggling to find pricing benchmarks


Jan 15 Leveraged loan pricing is rising in the U.S. as the first big deals of the year including a $2.525 billion buyout loan for retailer Petco Animal Supplies Holdings edge out into a turbulent market. Falling oil prices are dragging equities lower and complicating efforts by embattled banks to sell a multibillion dollar overhang of loans that were delayed from last year. Petco, which is rated B1/B, was chosen to reopen the market and establish a new pricing benchmark due to its strong financials, but pricing on the deal was increased last week and a new $700 million tranche was added with no Libor floor to boost returns for Collateralized Loan Obligation (CLO) funds after the deal received pushback from investors. Pricing on Petco's loan was increased by 25 basis points to 475 basis points over Libor with a 1 percent Libor floor. The no-floor tranche was added to protect returns for CLO investors against high Libor rates and will earn 500 basis points for investors. Petco's pricing is 75 basis points higher than the 400 basis points which competitor PetSmart paid last February on a $4.3 billion loan that backed its buyout by BC Partners. PetSmart later cut the price of the loan to 325 basis points over Libor from 400 basis points in May."Both the loan and bond markets have reasonably decent technicals right now, but the Single B part of the market is really where we are going to see how far things have steepened for new issue," said AJ Murphy, head of Global Leveraged Finance at Bank of America Merrill Lynch.

Investors are demanding higher pricing to compensate for higher risk and illiquidity in highly volatile markets and are focusing intently on selecting strong credits as their best defense against a possible downturn, which is driving market bifurcation. Software company SolarWinds, which also has a B1/B rating, launched a $1.5 billion buyout loan last week that was also held over from last year. The dual-currency loan, which is also rated B1/B, has higher pricing guidance of 500 basis points to 525 basis points over Libor and Euribor with a 1 percent floor and is also being sold in Europe. OVERHANG DILEMMABillions of dollars of U.S. leveraged loans including SolarWinds were put on hold late last year after a $3.3 billion cross-border loan for Veritas was pulled in November due to tough market conditions even after the company widened pricing to 500 basis points over Libor with a 1 percent floor and widened the discount to 95. A $1.35 billion term loan supporting Kraton Polymers' acquisition of Arizona Chemicals and a $575 million credit facility financing OM Group's buyout were also postponed.

Deals for companies that were perceived to be weaker credits, including a $1.5 billion buyout loan for department store Belk were forced to price at steep discounts as average secondary bids plunged. The SMi 100 index of the most actively-traded leveraged loans hit a low of 96.46 on December 18. The index, which is currently trading at 96.56, was trading at par last April. Market conditions have not improved significantly so far this year and persistently low secondary prices and negative macroeconomic developments since the start of the year are making it difficult for banks to underwrite new deals and harder for private equity firms to model pricing and have confidence that committed financing is available.

"The sponsors are not bringing deals right now and seem hesitant until they have a better feel for the market," an investment banker said. Petco and SolarWinds are expected to establish pricing benchmarks and the levels that they set will determine if more of last year's overhanging deals return to the market. Both deals will need to price and trade well for that to happen."If there's an LBO you're going to launch, it's going to be Petco," a second banker said. "It's not a question of do people want to own Petco, it's a sense of where do people want to own it."Investors continue to show a strong preference for highly-rated credits and pricing on two deals has tightened this year as cash-rich investors try to buy loans that they are confident will perform well. Pinnacle Foods sliced pricing on a $550 million term loan rated Ba2/BB+ to 300 basis points over Libor from 350 basis points last week, while fiber network company Zayo cut the price on a $400 million acquisition term loan to 350 basis points over Libor from 375 basis points. Selected lower rated credits have also been able to cut pricing. B1/B-rated contact lense maker 1-800 Contacts tightened spreads on a $500 million buyout loan to 425 basis points over Libor with a step down to 400 basis points over Libor with a 1 percent floor from original guidance of 450 basis points to 475 basis points.