A Refi Wave That's Alive and Well: Syndicated Loan Amendments

Loan refinancing may be slowing down, but companies around the world are still flexing their muscles to decrease pricing on existing syndicated loans at a record pace. As of Nov. 4, 340 such amendments have been signed, which already exceeds the full-year record of 178 facilities set in 2011, according to Dealogic.

The volume of loan amendments to decrease pricing also stands at a record high of $270.4 billion for the year to date, up from only $46.8 billion in a comparable period in 2012.

The majority of this activity, or 300 of the deals, have been completed by U.S. borrowers. The most active sector in seeking decreased pricing was in technology, where 40 loan facilities were changed compared to just nine in the first 10 months of 2012.

Dealogic's data includes investment grade and noninvestment grade loans. But examples include Pro Mach, a single B-rated packaging equipment manufacturer that is in the process of re-pricing its $314 million term loan due in July 2017. It is offering to pay existing lenders a spread of Libor plus 325-350 basis points, according to a person familiar with the transaction. That spread comes with a Libor floor of 1% and assumes a price of 100% of face value. Barclays is the lead bank on the loan repricing.

Rated B2 by Moody's Investors Service and B+ by Standard & Poor's, Pro Mach is owned by an affiliate of The Jordan Company and certain members of its management team.

Borrowers have also used this year's amendment frenzy to extend the maturities of $608.2 billion worth of loans through Nov. 1, the highest total on record since 2008, when Dealogic began tracking the number of value of leveraged loans with maturity term changes.

No End to Amend-to-Extend

Fitch Ratings' Darin Schmalz said borrowers have been taking advantage of lower Treasury and Libor rates and a good spread environment this year to push for both lower pricing and for "amend-to-extend" agreements with lenders. "There's some cost benefit to it, and there's some simplicity standpoint to it," said Schmalz, "but it's clearly taking advantage of some more aggressive trends that we've seen in covenant-lite deals, more baskets, issuing some more debt and issuing dividends."

Issuers weigh the benefits of paying amendment fees worth just 50 to 75 bps vs. the high costs associated with a new syndication. And many are finding lenders are willing to give up yield rather than refinance a deal that would have them sitting on more cash providing little return.

"We definitely see refinancings decreasing," said Schmalz, a director in Fitch's leveraged finance group. "It was close to 60-70% of the market over the first five months of the year," but over last three to four months, has dropped to 40%.

Adam Cohen, president of independent bond and loan research firm Covenant Review, also noted that loan issuers have also been introducing amendments to loosen covenants against dividends or share buybacks, financial maintenance or hard caps on unsecured debt levels, replacing the latter with softer leverage ratio ceilings. "Lenders often accepted these covenant changes just as part of the deal for keeping their portfolio invested generally and in that credit," said Cohen.

Recent examples of amended deals include Pinnacle Foods Finance, which in April added an unlimited debt covenant carve out when it was extended due dates and lower rates on its $1.58 billion seven-year term loan and $150 million five-year revolver (both facilities are rated B3). Cohen said Pinnacle's builder basket for investments, restricted payments and junior debt prepayments used an aggressive, cumulative CNI-based growth component — imported directly from its high-yield bond indentures "that is backdated to 2007 and results in a staggering amount of available dividend capacity."

Pinnacle is rated B1 by Moody's and B+ by S&P.

To take another example, in May SeaWorld Parks and Entertainment used amendments to reduce pricing and extend the maturity for a Ba3-rated $1.4 billion term loan, and was able to reset its total leverage ratio level under its maintenance covenant to 5.75x for the life of the loan and halting any future step-downs for the covenant, according to Cohen.

SeaWorld is also rated B1 by Moody's and B+ by S&P.

High Volume

According to Dealogic, the volume of all types of syndicated loan amendments, including repricings, extensions of maturities and changes in covenants, reached $3.217 trillion through Nov. 1 worldwide. That is the second-highest total since 2007's record-setting $4.335 trillion level in the same time frame.

This year's figures thus far are only eclipsed by the 2011 figure of $3.517 trillion, when lower interest rates and an improving economic outlook had companies returning to lenders with more favorable addendums.

Loans continue to attract investor interest as a safe haven for two reasons. The low interest rate environment and the promise of rising interest rates coming with Federal Reserve stimulus tapering expected next year drives investors to loans to be protected from rising interest rates. Investors also value the security of loans being higher in the capital structure in times of potentially increasing volatility.

Both Cohen and Schmalz expect the amendment phase to wither in the closing two months of the year, simply because the source of potential candidates for these deals has been exhausted.

"So the refinancing, repricing wave has slowed down to more aggressive proceeds, and probably going to continue through the remainder of the year," says Schmalz. "If you haven't refinanced or repriced your deal by now, there's something wrong."

This story originally appeared on leveragedfinancenews.com