IFR-Pricing sliding in US leveraged loan market

Mon Feb 21, 2011 1:44pm EST

(The following tale appeared in the Feb. 19 issue of
International Financing Review, a Thomson Reuters publication)

By Michelle Sierra Lafitte

NEW YORK, Feb 19 (IFR) - Pricing is sinking as liquidity
pours into the US leveraged loan market. Companies are
exploiting this surplus liquidity in a rapid and aggressive
refinancing round and more are lining up to cut borrowing costs.

Some $87 billion of loans have been issued to refinance
existing debt in 2011 so far, which makes up just under 60
percent of the $151 billion of US leveraged loans issued in the
year to date, according to Thomson Reuters data.

Refinancing volume is nearly three times higher than
new-money borrowing this year and is expected to maintain its
pace - at least until the M&A wave starts to roll again.

Liquidity is pouring into the market. $926.6 million of
institutional inflows hit the market in the week ending February
16 from bank loan mutual funds, according to Lipper FMI.

Inflows have averaged $700 million per week in the past
seven weeks, which has brought more than $4.3 billion into the
market this year.

Two weeks ago, the loan market saw a confirmation weekly inflow of
$1.05 billion into mutual funds, Lipper said.


This cash needs to find a home and US leveraged loan
pricing, which was historically high after the credit crunch
has collapsed by up to 200 basis points (b.p.) since December in
a fall that one older leveraged financier described as the
market's most dramatic go in 15 years.

"We are scratching the surface because everything - mostly
all of the deals placed in 2009-2010 - are overpriced," a banker
said. "Given all this liquidity, there is no reason why every
single one of them wouldn't refinance right now."

Repayments from high-yield bonds have left investors flush
with cash that needs to be reinvested and they have flocked to
leveraged loans, attracted by current yields, the appeal of a
floating-rate instruments at a time of rising interest rates and
the potential of some upside in the lesser market.

A limited amount of new issuance has exacerbated this trend
and too much money is now chasing too few deals.

A window of opportunity is now wide open for issuers.
Spreads have come down to 300-325 b.p. over Libor from 450 b.p.,
bringing substantial savings that are making it worthwhile for
issuers to return to the market, in some cases after only two or
three months.

Source: Reuters.Com