Anyone who slipped into a coma 10 years ago and suddenly woke up today, may come to the erroneous conclusion that not much had happened in U.S. debt and equity markets over the past decade. Like in 2007, equity markets seem to surge to all new highs with each passing day, corporate credit spreads have tightened to 10-year lows and leveraged loan refinancings are soaring as all the "money on the sidelines" just can't seem to find a home fast enough.
As the Wall Street Journal noted today, the fear of rising interest rates, which have so far largely been offset by tightening spreads for corporate levered loan borrowers, has sparked a massive wave of corporate loan refinancings, including $100 billion worth of volume in January 2017 alone. Moreover, per data from LevFin Insights, $222 billion, or nearly 25% of the entire leveraged loan market, has been refinanced since October.
Rising interest-rate expectations are fueling the biggest corporate-refinancing boom in years.
U.S. companies refinanced $100 billion of loans in January, the largest monthly total in at least a decade, according to data from S&P Global Inc. More than 110 low-rated companies, including software giant Dell Technologies Inc. and car-repair chain Service King Collision Repair Centers Inc., have refinanced loans since October, according to data from LevFin Insights LLC.
Borrowers in recent months have saved more than $1 billion in annual interest costs by renegotiating terms with their lenders, according to a Wall Street Journal analysis of the data.
Total repricings since the start of October amount to $222 billion, representing 24% of all outstanding leveraged loans, according to LevFin Insights. Firms negotiated an average interest reduction of 0.59 percentage point.
Of course, rising interest rates, which are feared to continue pushing higher, are sparking this latest refinancing bubble...
...as corporate borrowers have sought to offset increases in LIBOR rates with tighter spreads.
Of course, none of this madness would be possible without all that "money on the sidelines" just waiting for the next new issue from Goldman that will grant them a 5% allocation at a spread 75 bps lower than the initial pricing talk.
The wave is being propelled by outsize investor demand for bank loans, floating-rate debt investments that are prized because they tend to perform well in rising-rate environments. The red-hot loan market has enabled many corporations to demand that lenders cut rates or face losing the business to a rival, a sign of how easy financing is enabling large firms to get advantageous terms in debt markets.
Persuading lenders to cut the rate on Service King’s $609 million loan by 0.75 percentage point took just a few days. The new loan will save the company about $4.5 million in annual interest expense that can be used for acquisitions instead, said Chief Financial Officer Michelle Frymire.
“There’s a lot of pent-up investor demand,” Ms. Frymire said. The Richardson, Texas, company has 309 auto repair shops in 23 states and is owned by private-equity firm Blackstone Group LP.
But, at the end of the day, if you're a pension or mutual fund manager you just have to keep buying because, you know, "animal spirits"...just ask Craig Russ of Eaton Vance.
Investors have poured $17 billion into loan mutual funds since Sept. 1, with $7.6 billion coming in December alone, according to data from Lipper Inc. It is the biggest such inflow since 2013, during the “Taper Tantrum” when the Fed’s plan to reduce stimulus fueled a surge into loan funds.
With few new loans to buy, fund managers who received new money from investors are scrambling to buy existing loans, pushing prices higher and spreads down. Companies and their investment bankers saw the opportunity to refinance and pounced.
“Animal spirits seem to have taken over investor appetite and the markets,” said Craig Russ, co-manager of Eaton Vance Corp.’s $7.5 billion leveraged-loan mutual fund.
While large banks still underwrite large corporate loans, they often sell the bulk of the debt to a mix of mutual funds, pensions, insurers, hedge funds and other institutional investors.