A chief buyer in the leveraged loan game may be vanishing, but that's not stopping new multi-billion dollar deals from appearing on the auction block.
Cracks have begun to emerge in the collateralized loan obligation (CLO) market, as Real Money reported. And the business of warehousing tranches of loans in order to form these so-called CLOs has become paramount to building sufficient market demand for new debt issuances, especially for loans rated below investment grade.
One of the two giant new loans coming to market is the debt of Phoenix-based tech firm ON Semiconductor (ON), which is set to launch a $2 billion 7-year loan via Deutsche Bank Thursday, to back its roughly $2.4 billion acquisition of Fairchild Semiconductor (FCS) at $20 per share, according to a person familiar with the talks. The deal will also be accompanied by a $400 million revolving credit facility. (On Semiconductor is a holding in TheStreet's Stocks Under $10 portfolio.)
The second comes from Nashville's HCA Holdings (HCA), which announced Tuesday a $1 billion bond offering, and is simultaneously stepping into the market with a $2 billion six-year loan via Bank of America, said a person who spoke on the condition of anonymity because talks are private. Price talk on the loan has been floated at Libor + 325-350 basis points, subject to a 1% floor (or the equivalent of about 4.4% annual interest), and investors have an initial commitment deadline of Friday, he added.
The market for high-yielding loans is not exactly a safe harbor lately, partially indicated by falling prices of CLO debt in secondary markets: tranches of CLOs that Standard & Poor's rates as BB -- two notches below investment grade -- have slipped on average by $0.17-$0.18 to roughly $0.60 on the dollar this year, a separate investment manager familiar with the private trading said in an email. Meanwhile, B-rated tranches are collectively trading down about 25% on the year, he said.
"The U.S. leveraged loan and high yield bond markets continued their respective new-issue struggles last week, with a combined $4.9 billion in deals," analysts with S&P's Leveraged Commentary & Data said in a Monday report. "While that number is up from the previous week, it's the second-lightest week of the year, issuance-wise, as both asset classes continue to focus on deals already in market ¿ like Solera (SLH) ¿ and as investors continue to tread lightly around all things risk." (Goldman Sachs successfully allocated Solera's more than $2 billion loan package on Monday backing its LBO by Vista Equity Partners.)
Year to date, the U.S. high-yield bond market has seen $13.65 billion in issuance. That's down a whopping 75% from the same period in 2015.
Leveraged loan issuance has fallen 5% so far this year, over the same period in 2015, with a total of roughly $51 billion coming to market, according to LCD. Meanwhile, high-yield bonds issuance has really been slowing, as issuance of the paper rated below BBB- is down 75% over the period at just under $14 billion.