Insight: Issuers flock to secured bond market to optimize executions, shrinking loan calendar

As 2019 begins to take shape, one of the clear trend lines forming is issuers opting to place senior secured bonds at least partially in lieu of institutional loans.

Dun & Bradstreet was the first to carve out $500 million of what was originally contemplated as a $3.13 billion TLB. CommScope followed suit with a $2 billion secured execution that reduces its institutional loan by the same amount, and TransDigm eschewed the loan market altogether, opting to place a slightly upsized $3.8 billion secured bond deal to fund its acquisition of Esterline Technologies that as recently as a few months ago it said it would finance in the loan market.

The high-yield market has come back to life in 2019 after shuttering for new business in the final weeks of 2018 due to the market volatility. Sentiment in loans, though certainly improved from December, remains tentative as mutual funds continue to experience meaningful outflows, albeit much less severe than December’s massive withdrawals. The new-issue CLO market, though back in business, is fragile after CLO liabilities fell into price discovery after December’s volatility. 

As such, high-yield offers better value to issuers than loans do, as evidenced by the secondary performance of a handful of pari passu loans and bonds:

? Refinitiv’s $6.5 billion TLB due 2025 (L+375) was quoted yesterday at 96–96.375, yielding 7.48% to maturity at the bid price using three-month LIBOR and 7.21% using one-month LIBOR. By contrast, the secured 6.25% notes due 2026 were trading around 98.75, yielding about 6.46%;

? Avantor’s term loan due 2024 (L+375) was marked yesterday at 99.75–100.25, yielding about 6.72/6.45%; the pari passu 6% notes due 2024 trade around 102, yielding about 5.51%;

? Bausch Health’s term loan due 2025 (L+300) was marked at 98.75–99.25 yesterday, yielding 6.13%/5.87% to maturity; its 5.5% secured notes due 2025 recently traded around 98.75, yielding about 5.73%.

To wit, initial whispers on the TransDigm first-lien bond deal were 6%-6.25%, which offered little to no premium to where TransDigm’s L+250 loans were trading prior to the announcement of the bond deal Monday evening. (Formal talk subsequently emerged at 6.375%, though that was after a planned $1 billion subordinated tranche was collapsed into the first-lien deal, with the deal ultimately pricing at 6.25%).

By comparison, the issuer’s TLE due 2025 (L+250) had been yielding about 6.08% to maturity at Monday’s 96.5 bid price using three-month LIBOR, or 5.81% using one-month LIBOR.

Relative value aside, TransDigm had another incentive to place secured bonds in lieu of term debt: its $7.6 billion of existing loans benefit from 50 bps of MFN protection. While TransDigm’s loans were around par at the time the Esterline deal was announced, the downdraft in the final weeks of the year pushed the paper well below par and thus an incremental loan would have proved costly for the B1/B+ rated borrower given the L+250 coupon on the existing paper.

TransDigm’s term debt has been active this week with the secured bond deal in market, initially trading up on the news the company elected to place the debt in the high-yield market though giving back some gains today. Take note the introduction of a multibillion-dollar secured bond into the capital structure has the potential to increase volatility in the term debt, what with the public reporting of trades and larger pool of potential investors.

Dwindling

Arrangers are likely to pitch secured bonds for other transactions coming to market in the near term, players say. Already, this phenomenon has detracted meaningful supply from the loan market. Assuming TransDigm intended to place the $3.7 billion of secured bonds in the loan market, the addition of secured bonds to these three transactions collectively reduces loan issuance by $6.2 billion.

The secured bond phenomenon is one of a few factors that have contributed to shrinking loan calendar. Players also report screening activity for future M&A/LBO deals has slowed following the late 2018 volatility, while arrangers have already launched or wrapped a handful of large deals that were on the calendar. The forward pipeline stands at $37.1 billion, down from $58.4 billion at the end of the year.

Furthermore, the addition of First Data’s nearly $7.2 billion of institutional loans to the repayments calendar has reduced LFI’s so-called “net net” calendar—which strips out all pending repayments from visible supply—to $19.5 billion, which is its lowest level since early November and nearly half of what it was in mid-January, prior to the news of the First Data acquisition.

— Kerry Kantin

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