Jefferies

Actionable Ideas for Companies and Sponsors

Increased Prevalence of Pricing Step-downs

As the leveraged loan market has strengthened throughout the year, the prevalence of pricing step-downs has increased dramatically. Step-downs lower the coupon spread above Libor, based on achieving a certain threshold of ratings or leverage level. Traditionally, pricing step-downs have been reserved for higher-rated (i.e., BB-rated) issuers but the strength of loan market now has allowed coupon step-downs to be used by both smaller issuers and lower-rated companies. The additional benefit of step-downs is that rate reductions are hard wired into the deal, and therefore, are realized by the issuer even in increasing rate environments. Ratings-based pricing grids are more common with higher-rated and lower spread loans, while leverage-based grids have been used with the lower-rated and highly leveraged loans.