US companies have rushed to renegotiate their loans at the start of the year, taking advantage of strong investor demand for debt that is more insulated against an expected rise in interest rates.
January’s re-pricing volume has already reached $41.6bn — the highest monthly volume since January 2013 with a further two weeks before the month ends, according to data from LCD, an offering of S&P Global Market Intelligence.
The robust activity reflects investors anticipating higher interest rates in the coming year in light of forecasts of a stronger US economy under the incoming administration of Donald Trump. That sets the stage for policy tightenings from the Federal Reserve during 2017, which is likely to hurt holders of fixed income debt.
In contrast with many bonds and other debt securities, loans provide some protection for portfolios in an environment of rising interest rates because they pay a set amount on top of a floating rate benchmark.
Investors poured another $1.3bn of cash into loan funds in the week to January 11, according to fund flows tracked by Lipper. Loan funds, which invest in company borrowings, have recorded inflows for nine consecutive weeks.
As money flows into the sector, it has spurred a supply-demand imbalance, with even riskier deals that struggled to close in the sell-off of 2015 finding willing buyers today, said Robert Cohen, the head of global developed credit at asset manager DoubleLine Capital.
“Investors are relaxing their investing standards and are more willing to accept riskier companies,” Mr Cohen added. “Investors have to put the money to work so loan prices get bid up. If you’re a borrower and see your loan significantly above par . . . that’s a good indication you could drive a little spread out of your loan.”
Some of the largest deals to take advantage of the favourable environment include a $2.65bn raising from mobile phone technology company Asurion, a $2.5bn loan consolidating debt from animal supplies group Petco and a $2.2bn repricing from Travelport, a payment and technology platform for the tourism industry.
Asurion’s loan will pay investors 3.25 per cent above Libor, reducing the company’s borrowing costs from Libor plus 4 per cent. When a company is looking to re-price, investors in the existing debt can lose out if they do not agree to the new deal, getting paid back on the original value of the loan, even if it is trading with a higher price.
“We are seeing strong demand right now,” said Christina Padgett, an analyst at Moody’s, a rating agency. “We are seeing companies wanting to go to market because demand is strong and pricing is still attractive. And that may not persist.”
The average saving for companies repricing loans in January stood at almost 80 basis points, according to LCD, up from 70bp a month before.
Those deals, which included loan offerings from Kraton Polymers and NN Inc that had been postponed in 2015 because of market turbulence, rebounded after selling at steep discounts. Late last year Kraton successfully cut the rate on its $1.28bn term loan by a full percentage point.