The tide is turning in the market for speculative-grade loans as investors refuse to buy some deals deemed too risky.
Rocket Software Inc. pulled $725 million of loans from the market this week that would have refinanced debt and paid for a dividend to its co-founders and private-equity firm Court Square Capital Partners LP, according to data compiled by Bloomberg. The deal is at least the third to be withdrawn in the last month, with cable TV provider WideOpenWest Finance LLC canceling $1.97 billion in loans and Dutch LLC, which does business as women's apparel company Joie, scrapping a $200 million debt offering.
The loan market is starting to show signs of tightening more than six months after the Federal Reserve and Office of the Comptroller of the Currency sent letters to banks telling them to improve their deteriorating underwriting standards. Investors are demanding better terms and pulled cash from leveraged-loan funds the last two weeks, snapping an unprecedented 95 straight weeks of inflows.
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"The balance of power, for the moment, has a little bit shifted to the buy side," Jonathan Insull, a money manager at Crescent Capital Group LP in New York, said in a telephone interview yesterday. "The market's been taking a breather, and people are using the opportunity to push back."
Junk-loan mutual funds had their first outflow in the week ended April 16, according to Bank of America Corp. data. Investors pulled $320 million and withdrew another $160 million the next week.
With all the money pouring into mutual funds, they couldn't "sit on cash and had to buy nearly every new issue that came to market," Trey Parker, head of credit research at Highland Capital Management LP in Dallas, said by phone yesterday. "Once that flow stopped, the buyer universe has become more discerning in what they are buying."
Issuance of new leveraged loans reached a record $355 billion in the U.S. last year, Bloomberg data show. Another $113.7 billion has been arranged this year.
Rocket Software postponed its deal after Moody's Investors Service last week revised the Waltham, Massachusetts-based company's outlook to "negative" because of the "large increase" in debt resulting from the proposed payout.
Dividend Deals
Dividend deals are viewed less favorably by investors than other types of offerings, said Insull, whose firm oversees $14 billion of speculative-grade debt.
"Nobody really loves that as use of proceeds," Insull said. In general, "people are looking for a little bit more yield."
Borrowing costs for issuers are going up. New leveraged loans sold to institutional investors, such as mutual funds, paid an average coupon of 3.94 percentage points more than benchmark rates as of April 24, the highest since July and up from 3.71 percentage points in February, according to Standard & Poor's Capital IQ Leveraged Commentary & Data.
WideOpenWest and Dutch were both seeking loans to refinance existing debt, Bloomberg data show.
Andy Youniss, chief executive officer of Rocket Software, and Richard Fish, chief financial officer for WideOpenWest, didn't respond to calls for comment. Nancy Cuocci at BPCM, the communications firm listed on Joie's website, said she wasn't able to reach the company for comment.
Rocket Software and Englewood, Colorado-based WideOpenWest are rated B2 by Moody's and B by S&P, each five levels below investment-grade. High-yield, or junk, debt is rated below Baa3 by Moody's and less than BBB- by S&P.
High-yield loans have returned 1.14 percent this year, less than half the 2.73 percent gain in the same period of 2013, according to the S&P/LSTA U.S. Leveraged Loan 100 Index. The debt is underperforming U.S. junk bonds, which have gained 3.71 percent this year, Bank of America Merrill Lynch index data show.
"The first week we saw an outflow," that "caused the overall market to take a pause," said Highland's Parker, whose firm manages about $18.7 billion. "The question" was: "'Is this an inflection point?'"
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