Tuesday, November 25, 2008

Fire sale prices spark shift to loan buybacks

By Nicole Bullock in New York Published: November 24 2008 19:37 Last updated: November 24 2008 19:37 Fire sale prices in the US leveraged loan market are finally attracting buyers – the borrowers themselves. Enticed by the lowest prices ever for leveraged loans, six companies unveiled a total of $2.4bn worth of proposals to repurchase their existing loans in November, according to Standard & Poor’s Leveraged Commentary & Data (S&P LCD), which tracks the leveraged loan market. Though buybacks are common in the equity and corporate bond markets, they are a new phenomenon for loans. And the idea remains controversial. “The recent well-spring of proposed tenders is a mixed blessing at best,” says Steven Miller, managing director at S&P LCD. A buyback can inject sorely needed cash into the loan market, where heavy selling has set the asset class on track to report its first annual loss ever. In the boom years, leveraged loans were driven by the interest of hedge funds and other leveraged buyers. Now that these players are selling assets to raise cash and to meet margin calls and redemptions, loans are among the hardest-hit asset classes. Average prices recently hit a new low of 67 cents on the dollar. Against that backdrop, any buyer might be a good one. “Prices are so low and liquidity is so thin that investors are willing to do this because investors are looking for a way to sell into an illiquid market,” says a leveraged finance banker at a large bank. While a rare opportunity to repay debt at discount is clearly a good move for the borrowers, the situation is less clear for the lenders. To start with, the lending group must accept less than par value. Buyback proposals have typically been near current trading levels and until now, repayment at 100 cents on the dollar has been sacrosanct in the loan market. Another concern is the potential conflict of interest created if the borrower builds up a position in its own debt, creating a scenario where it could influence key lender decisions, such as enforcing a default. “No lenders want their loan to be controlled by the borrower,” says Eli Weber of Clifford Chance. These issues have led to piecemeal approval of tender requests. In the past few weeks, companies such asWynn Resorts and Allison Transmission have convinced lenders to approve sizeable buybacks, whereas lenders refused to agree a buyback from Hanesbrands, market sources say. As the weak economy begins to hurt companies’ financial performance, a buyback can provide a back door means to inject equity while cutting debt or avoiding tripping covenants in loan agreements, thus staving off a potential default. The outlook for loan buybacks remains clouded by myriad issues for lender and borrower. Whether the market will see a rash of them ultimately comes down to price. “It will be a continuing trend as long as the market is trading at these levels,” says Tom Newberry, head of leveraged finance origination at Credit Suisse. “The reality is that a bid is a bid.”

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