The Wall Street Journal-20080126-Libor Sinks Leveraged Loans
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Libor Sinks Leveraged Loans
NEW YORK -- Just when it seemed circumstances had deteriorated to the worst they could possibly get for leveraged-loan underwriters, they got worse.
The London interbank offered rate, off which leveraged loans are priced, has been on the decline as central banks have infused the financial system with liquidity. With three-month Libor in the 3.3% area, underwriters are faced with the task of making leveraged loans attractive to investors who've grown accustomed to healthier yields as a result of a much higher underlying Libor.
A year ago, when selling risky loans was in full swing, three-month Libor stood around 5.36%. The rate spiked up to 5.72% in September, as short-term money markets froze.
"We're repricing the market. The loan market has seen an almost 190 basis points [1.90 percentage points] loss in spreads because of Libor," Kingman Penniman, president of KDP Investment Advisors, said. "The market is now saying we have to make it up, and yields are starting to come down, so [there's] pressure on loan prices to maintain or enhance the spread levels."
It is a frustrating situation for underwriters in the market with Harrah's Entertainment Inc.'s leveraged loans. They are attempting to sell $3 billion of the $7.25 billion loan for Apollo Management LP and TPG's buyout of the casino operator. But market participants said the deal isn't an easy sell for the underwriting syndicate, led by Banc of America Securities and Deutsche Bank, because of the low cumulative yield on the debt.
Bankers have been shopping the debt with a coupon of three percentage points over Libor at a discounted rate of 96.5 cents. Taking into consideration the discount and the current Libor level, Manny Labrinos, a portfolio manager at Nuveen Investments, said that's about a 7.25% to 7.5% yield, not much for a highly levered transaction at a time of widespread risk aversion.
Prices in the loan market have been depressed recently, wallowing in the 91-cent area, according to Standard & Poor's Leveraged Commentary & Data unit. Libor's low levels have the potential to keep the loan market in the doldrums.
Underwriters aren't in an enviable situation. They are already losing their fees by offering the debt at a discount; below a certain price -- typically 98 cents -- they go from losing fees to simply losing money on the transaction.
Treasurys Extend Gains
Treasurys marched higher, as the recent surprise rate cut from the Federal Reserve and prospect of help from the government failed to squash worries about the banking system and the economy.
The benchmark 10-year note rose 16/32 point to 105 15/32. Its yield, which falls when prices rise, slipped to 3.582% from 3.642% the previous day.
-- Deborah Lynn Blumberg
