(Bloomberg) -- Investment bankers who cater to private equity firms are offering to do deals for free as a global rally drives rampant demand for leveraged loans.
They’re pitching a high volume of transactions simply to lower borrowing costs on existing leveraged loans, sometimes even volunteering to do them for nothing just to stay in the running for future deals, according to people familiar with the matter.
Banks are willing to take the hit partly to justify headcount, keeping their bankers busy in the absence of M&A activity, and to maintain their rankings in league tables, the people added, speaking on condition of anonymity. They’re also hoping to take pole position for when PE firms pick arrangers on acquisition financings, they said.
These pay between 2% to 3% in fees, amounting to about €12.5 million ($13 million) on a deal of €500 million, compared with minimal fixed fees of anywhere between €100,000 to €500,000 for a repricing, some of the people said.
If it’s tough for banks, it’s even tougher for investors watching the profits on their existing loans frittered away. And by accepting ever-lower rates, investors have a smaller cushion to carry them through any economic slump, putting returns at risk.
The biggest winners of the repricing frenzy? The private-equity firms that own many of the borrowers. Their companies are coming back again and again for lower rates to seize on rampant demand.
“While issuance has gone up, the demand for assets has gone up even more,” said Peter Gleysteen, the chief executive officer at AGL Credit Management.
All told, more than 80% of dollar and euro-denominated loans issued in January were used to reprice existing debt, according to data compiled by Bloomberg. In Europe alone, repricings accounted for 88% of loan volume, almost twice as much the month before, the data show.
The repricing wave has brought down margins by an average of 55 basis points, according to Citigroup Inc. research published this week. Some deals shaved off over 100.
Demand for these assets comes from collateralized loan obligations — investment vehicles that principally repackage leveraged loans into bonds. They account for 70% of the buyer base. Recently, a slowdown in M&A while CLOs have been drawing in more cash has left them short of places to invest.
“The lack of supply is hitting everyone,” said Jeremy Burton, a portfolio manager at Pinebridge Investments who specializes in high-yield bonds and leveraged loans. “But you’ve got investors that need to invest cash or keep cash invested.”
CVC-owned frozen baked goods business Monbake wasted little time getting better rates on its loans. About eight months after raising a loan to finance its buyout, it was back in the market with a repricing. Investors lined up to buy the debt without an update on the company’s performance and financial metrics since its last deal, according to people familiar with the matter.
A spokesperson for CVC declined to comment.
A $2.7 billion, euro and dollar deal for energy firm Aggreko was so well received the company increased the size of the repricing and slashed pricing during the process. It managed to shave 125 basis points off its current margins.
Even a reduction of “25 or 50 basis points is significant in the context of larger capital structures,” said Stephen Ketchum, the founder of investment manager Sound Point Capital Management.
Private equity firms are also lining up loans in case the US president carries out campaign threats to slap tariffs on major trading partners, something he’s refrained from doing in his few weeks in office. Such levies could crimp global growth, lift US inflation and potentially cause the Federal Reserve to hold back from interest-rate cuts this year.
Loan repricing highlights
Leveraged markets are running so hot that banks are pitching deals before a so-called soft-call period ends, dancing around the investor protection and lining up the new cut pricing so it kicks in immediately after the old ‘soft-call’ ends, according to people familiar with the matter. Aenova, for instance, is in the market with a proposed €400 million loan to shave up to 50 basis points off its borrowing costs.
Soft-call protection is in place for six months, meaning borrowers have to pay investors a penalty if they decide to reprice or refinance within that time. That’s traditionally been enough of a deterrent for borrowers to hold fire on any repricings during that time.
There are already signs that lenders are fighting back for better protections. In a recent deal for Irish petrol station operator Applegreen, investors demanded that the company increase its six-month soft call period to 12 months.
Investors tend to tolerate repricings from borrowers who have improved their performance or have cut leverage levels over a particular period of time. But they see this wave of deals as being purely opportunistic.
“There has been a number of names that have repriced three times in the last 12 months,” said Ivo Turkedjiev, a managing director at CLO issuer New Mountain Capital. “And that keeps growing. That can cause fatigue.”
--With assistance from Amedeo Goria.