Actionable Ideas for Companies and Sponsors
Financing with Secured Bonds Versus Term Loans
During 2019, the syndicated loan new issue market has slowed significantly, driven by the Federal Reserve change in policy away from raising rates, which has driven investors away from floating rate debt. This has been coupled with loan investors tightening documentation and widening pricing. In contrast, the high yield new issue market has been very active, with many transactions pricing at the lower end of the coupon range and with issuer-friendly terms. In addition, in today’s market, a B-rated secured bond of similar maturity to its equivalent term loan would price in-line or tighter than the term loan. This change in investor demand for fixed rate bonds is supported by positive fund flows into the high yield market and away from the leveraged loan market. Year-to-date, the high yield market has experienced $8.8 billion of inflows, while the leveraged loan market has experienced $10.0 billion of outflows. The recent $4.2 billion Dun & Bradstreet LBO financing included $700 million of secured notes that priced at 6 7/8% or 135 basis points less than the equivalent $2.5 billion term loan which priced at a yield of 8.23%.