Companies should be refinancing more leveraged loans now, because some of the biggest investors will soon be less able to buy, according to Lauren Basmadjian, co-head of liquid credit and head of US loans and structured credit at Carlyle Group.
(Bloomberg) — Companies should be refinancing more leveraged loans now, because some of the biggest investors will soon be less able to buy, according to Lauren Basmadjian, co-head of liquid credit and head of US loans and structured credit at Carlyle Group.
Basmadjian spoke to Bloomberg’s Carmen Arroyo in a series of interviews that ended on July 19. Comments have been edited and condensed.
Are companies refinancing or extending their maturing loans? There’s a wall of maturities through the end of 2025.
Companies are not dealing with it as quickly as we believe they need to.
They think they may get better pricing in the second half of the year. But we’re seeing a trend we’ve never really experienced before among the biggest buyers of loans, namely collateralized loan obligations: 40% of CLOs are coming out of their reinvestment periods, and won’t be able to buy as much, or extend maturities on their loans.
We believe bankers need to inform companies it could be now or never to refinance their debt because with each quarter that goes by, more CLOs exit the reinvestment period.
A year ago, these companies could have gotten about 90% of CLOs that own their debt to extend the loan. Now, at best, we believe they can get 60% to 70% on board, and that’s likely coming down every quarter.
On top of that, we believe that the loans maturing in 2024 and 2025 are worse quality than the rest of the market, with a higher percentage of CCC debt sitting in there. Borrowers will have to go to other sources of capital, maybe private lenders, maybe secured bonds. If not, they’ll see their ratings cut further and have to restructure, as rating agencies are very concerned about maturities right now. There’s going to be a high proportion of near-term maturities among the names that restructure during this cycle.
There’s no easy answer right now, and our view is that it gets harder throughout the next six months.
CLO issuance has fallen more than 25% this year. How are you viewing issuance for the second half?
There will probably be more print-and-sprints, where during periods of weakness, CLO managers put together loan portfolios in the mid 90 cents on the dollar.
These have become much more common since the Russian invasion of Ukraine. They show that the loan market fixes itself: if loan prices go down, you see CLO creation and prices increase.
It’s also hard for managers to get buyers for the AAA tranche of the CLOs. Has this improved from late last year?
We believe the market is healthier than late last year and you can see that in spreads that are now closer to 170 basis points over the benchmark as opposed to 220 basis points late last year. That’s partly because other buyers besides the large US banks have stepped up and bought AAAs.
But it’s not making up for the lack of US bank demand. And banks haven’t signaled they are coming back in force anytime soon yet.
Are CLOs taking advantage of the loan rally?
We’ve had a massive rally in loan prices in the last month, so equity holders are looking at the underlying loan portfolios and asking themselves if it’s a good time to sell. Some are selling. Last week, we saw four auctions, or bid lists, that we believed were equity holders selling loans on CLOs they had called.
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