Repricing activity in leveraged loan markets spiked in Q1 2021 as abundant liquidity and strong investor demand fueled surges in the US and Western and Southern Europe.
A repricing typically occurs when new incremental loan facilities and/or refinancing facilities are introduced into the same documentation as an existing loan. The proceeds from the new incremental loan facility will have a lower margin and will be used to repay the existing loan. A rise in repricing issuance typically indicates a hot loan market.
This increase was particularly evident in the US, where repricings in the leveraged loan market jumped from US$1.8 billion in Q4 2020 to US$122.8 billion in Q1 2021. In terms of use of proceeds, repricings represented almost a third of total US leveraged loan issuance in Q1 2021, coming in second to refinancing (US$157.6 billion) and followed by combined M&A/buyout activity (US$75.7 billion).
In Western and Southern Europe, repricing issuance increased almost tenfold between Q4 2020 and Q1 2021, from US$2.4 billion to US$20.8 billion quarter-on-quarter. Repricings accounted for more than a fifth of total issuance in the region in the first three months of the year, ahead of loan issuance for buyouts (US$19 billion) and M&A (excluding buyouts) (US$17.1 billion).
Low interest rates open repricing window
Following strong demand and low interest rates in the first months of the year, loan pricing tightened in favor of borrowers. Average first lien institutional loan margins in the US came in at 3.47% in Q1 2021, down from 4.17% in Q4 2020 and 4.24% in Q3 2020. In Europe, the average institutional loan margin on first lien loans was 3.71% in Q1 2021, down from 4.01% in Q4 2020 and 4.25% in Q3 2020.
Many issuers jumped at the chance to reprice existing credits: Analysis by S&P Global shows that borrowers in the US that repriced credits in the first six weeks of 2021 were able to cut the credit’s spread over LIBOR by 66 basis points on average. Factoring in the drop in the LIBOR floor since the credit was originated, US borrowers have saved 79bps per repricing on average, according to S&P.
Recent examples of successful repricings in the US include internet domain registrar GoDaddy, luxury apparel group Canada Goose and private security firm GardaWorld.
GardaWorld entered into an agreement to reprice a term loan B facility due in October 2026 from LIBOR +4.75% to LIBOR +4.25%. The deal also saw GardaWorld increase the size of the term loan B from US$988 million to US$1.08 billion. Canada Goose repriced a US$300 million term loan B due in October 2027 to LIBOR +3.50%, lowering the spread from LIBOR +4.25%. In the case of GoDaddy, the internet domain group was able to lower the spread on a US$746 million term loan B due in August 2027 from LIBOR +2.50% to LIBOR +2.00%.
In Europe, successful repricings have been secured by Gerflor, a French flooring manufacturer; Dellner Couplers, a Swedish maker of railway components; and Rovensa, a Portuguese agricultural products supplier.
Gerflor, backed by Belgian private investment platform Cobepa, repriced a €900 million facility at Euribor +3.75%, down from Euribor +4.25%, while Dellner Couplers, backed by buyout firm EQT, secured a rate of Euribor +3.75% on a €300 million loan, down from Euribor +4%. Rovensa, meanwhile, locked in a rate of 3.75% over Euribor for a €520 million loan that was priced at a margin of Euribor + 4.50% prior to the repricing.
Lenders willing to reprice given shortage of new deals
Lenders have obliged when approached about repricings rather than risk losing existing credits or miss an opportunity to invest in a market that has seen a shortage of new-money deals. Repricings offer opportunities to invest—or stay invested—in a competitive loan market characterized by limited new-money deal flow.
Such has been the momentum in the leveraged loan space in the US and Europe that anecdotal evidence suggests borrowers are now gearing up for repricings months before the call protection periods on their loans expire. Call protection periods—which are typically set at between six and 12 months in leveraged loan deals—protect lenders by preventing borrowers from paying off loans early and depriving investors of interest payments.
Term Loan B (TLB) loans will include “soft call” provisions, where borrowers pay a fee if they choose to reprice or refinance loans before the soft call period expires. Soft calls will usually have “101 protections” that require the payment of a 1% premium to the investor when a loan is redeemed in the “soft call period” for the purposes of a repricing.
In the current loan market, borrowers are preparing to reprice loans the day after call protection periods run out. This has been driven by banks chasing arrangement fees and financial sponsors that have actively pitched issuers to reprice and lock in better rates as soon as they can after call protection expires.
The rate of repricings in 2021 will depend on sustained low interest rates and the ongoing disconnect between demand and supply of loan opportunities among investors.
As long as markets remain liquid and a low rate environment persists, however, borrowers are likely to find that lenders are willing to reprice incumbent loans at lower prices.
