AI: Opportunistic Refinancing of Secured Loans with Secured Bonds

Actionable Ideas for Companies and Sponsors

Opportunistic Refinancing of Secured Loans with Secured Bonds

The new issue high yield bond market has strengthened over the last several months, buoyed by an influx of capital from investors shifting from floating-rate to fixed-rate exposure in response to the Federal Reserve’s rate action. This change in investor demand has manifested itself in significant fund flows into the high yield bond market and away from the leveraged loan market. Year-to-date, the high yield bond market has experienced approximately $10 billion of inflows while the leveraged loan market has experienced approximately $25 billion of outflows during the same period. This shift in demand has created an environment where secured high-yield bonds trade approximately 90 bps inside their secured loan comparables. The recent $1.87 billion CITGO refinancing, sole managed by Jefferies, included $1.37 billion of secured notes that priced at 9.25%, or 111 bps inside the equivalent $500 million term loan, which priced at a yield of 10.36%.

Therefore, companies that have callable indebtedness should consider issuing secured high yield bonds to lock in long-term, fixed-rate financing at meaningfully lower cost than floating rate equivalents. Companies taking this course of action will also benefit from the looser set of covenant packages associated with high yield bonds, a covenant disparity that has only increased in the face of continued tightening of loan documentation.