Australian corporate borrowers seek some TLB
The Thomson Reuters monthly loan market statistics show that for the first quarter this year, the size of major-currency syndicated loans in Asia Pacific (excluding Japan) averaged US$337 million. While this was well up (by 26 per cent) on the comparable period in 2013, it was down nine per cent from average loan size in last year's comparable period.
Statistics for Australia and New Zealand show that this market accounted for 32 deals, with a total volume of US$8.97 billion in the first quarter of 2015. Looking at year-to-date figures, there were a further five deals in Australasia, pushing total YTD volume to about US$11.5 billion.
More interesting, though, are developments in the US loan markets. Thomson Reuters analysts said a "substantial supply-demand imbalance" had left institutional investors "scavenging for leveraged assets", and US lenders "found opportunities" among sub-investment grade Australian corporate issuers.
"The most recent Australian loan to work its way through the US institutional market was the A$900 million (US$706m) financing for the Leighton Holdings-Apollo Global Management joint venture. The deal, which had a unique Australian dollar tranche (in addition to the US dollar-denominated tranche), was the first of its kind," the analysts observed.
The Ba2-rated credit was heavily oversubscribed, prompting a 25 basis points "reverse flex on the drawn spread" (presumably this means the borrower achieved a discount on the loan pricing, as opposed to paying a premium) to settle at 450 bps over Libor for the USD-denominated tranche. Similarly, the AUD-denominated tranche saw spreads trimmed 25 bps to close at 550 bps over BBSY.
So far, most Ba2 and Ba3-rated senior "term loan B" loans from Australian borrowers have been able to enjoy favourable pricing conditions, according to Thomson Reuters. (As a 2013 KPMG paper on the topic explained: "a term loan B is more 'bond-like' with generally longer tenors, in comparison to a term loan A, which is a more traditional form of bank debt financing").
Australian sub-investment grade corporates have latched onto this funding option in recent years as it offers comparable funding to the US high-yield or "junk" bond market, with more flexible terms. Likewise US investors in recent times have been flocking to loan with businesses they can understand, to the benefit of the borrower.
For example, in 2013 Nine Entertainment Group secured pricing of 275 bps, after the margin was "flexed down" from 325 bps. Also in 2013, Pact Group managed to use the laws of supply and demand to trim its loan margin from an initial "price talk" of 325 bps to 350 bps, down to 275 bps at close.
The option to include AUD denominated tranches will see the market boosted further, as Australian instos will seek to access a class of assets paying the yield of US junk bonds without the cost of hedging a basis swap risk.
"But all deals are not created equal: a number of Australian B1-rated TLB loans had to sweeten pricing to appeal to US investors," Thomson Reuters warned.
The most recent example of a borrower getting a shock was Chemstralia, which began marketing its A$515 million seven-year secured TLB with an initial yield of 5.25 per cent, but ended by adding a full 100 bps to complete the deal in February. The funds were needed in order to acquire the chemical distribution and watercare businesses of ASX-listed Orica.
The ASX-listed Alinta Energy had a similar experience in 2013, when the power company found that needed to "improve" its offer twice from "sounded pricing" in the range of 425 bps to 450 bps, before settling on a final 537.5 bps yield.