Some lower-rated businesses are being forced to pay up to complete new debt offerings even as others attract robust demand for their bonds and loans, a sign the debt market is bifurcating at a time of increased uncertainty about the economic outlook.
In recent days, a diverse group of businesses including the food retailer Smart & Final Grocery, dialysis provider U.S. Renal Care Inc., and water transportation company WaterBridge Resources LLC have all revised loan sales to offer them with deeper price discounts, higher interest rates and stronger investor protections known as covenants.
Smart & Final Grocery, which is trying to finance its buyout by Apollo Global Management LLC, last week reduced the size of its loan to $320 million from $380 million before bumping it up to $340 million on Monday, according to investors familiar with the deal. The loan is now being offered at 90 cents on the dollar with a floating interest rate set at the benchmark London interbank offered rate plus 6.75 percentage points. That compares with the original guidance of a 97 cent to 98 cent price and Libor plus 6.5 percentage point interest rate.
Apollo Global Management and Smart & Final declined to comment for this article. U.S. Renal Care and WaterBridge Resources didn’t immediately respond to requests for comment.
While investors have particular concerns about the grocery business, some said that Smart & Final Grocery’s challenges in selling its debt were also indicative of broader trends.
The company’s loan is rated B by S&P Global Ratings and B3 by Moody’s Investors Service—just above near-rock-bottom triple-C ratings. That potentially made it less attractive to a major buyer of loans, so-called collateral loan obligation structures. CLOs can hold only a limited amount of triple-C debt and their managers have become concerned of late about the growing number of loans that are rated close to triple-C, which they fear could be downgraded in the future.
Meanwhile, mutual funds that specialize in buying loans have suffered months of steady net outflows due in large part to the decreased appeal of floating-rate loans at a time when many expect the Federal Reserve to start cutting interest rates. That has further decreased demand for loans even as there has been an uptick in the volume of new loans being marketed to investors.
Even so, many companies are still having little trouble issuing debt. Last month, companies sold $26.3 billion of speculative-grade bonds, the largest monthly total since March 2018, according to LCD, a unit of S&P Global Market Intelligence.
On Monday, Nexstar Media Group Inc. moved up the deadline for investors to buy its roughly $3 billion loan backing its purchase of Tribune Media Co. , a sign of the strong demand for debt at the higher end of the speculative-grade ratings scale.
“It really depends on the credit right now,” said Frank Ossino, senior portfolio manager and sector head of the bank-loan asset class at Newfleet Asset Management. “It’s a market of haves and have-nots.”
Since late April, concerns about the economic outlook have sent investors into the safety of U.S. government bonds, while pushing up the extra yield, or spread, that investors demand to hold corporate bonds over Treasurys. However, both Treasury yields and corporate bond spreads have stabilized in recent weeks.
In recent trading, the yield on the 10-year U.S. Treasury note was 2.082%, according to Tradeweb, compared with 2.093% Friday. Yields fall when bond prices rise.
The WSJ Dollar Index, which measures the U.S. currency against a basket of 16 others, was recently little changed at 90.74.
Write to Sam Goldfarb at sam.goldfarb@wsj.com
https://www.wsj.com/articles/loan-market-splits-between-haves-and-have-nots-11560794011
2019-06-17 17:53:00Z
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