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William Hoffman

Will Caiger-Smith

Strong demand for leveraged loans is already driving borrowers to rejig deal structures as the first transactions of the year cross the finish line. This dynamic is likely to persist in upcoming deals such as AthenaHealth, which is giving early looks at its LBO debt.

With the Fed widely expected to hike rates three times this year starting in March, investors are clamoring for more floating-rate exposure. That is driving them towards leveraged loans just as January’s deal pipeline kicks into high gear. 

“Duration management is top of everyone’s mind right now, and one tool for that is loans,” said a loan-focused portfolio manager. “There are some big deals in the market now and it is wide open.”

There was evidence of this trend in Golden Nugget’s dividend recap transaction this week. The term loan portion was initially marketed at a size of $1.85bn, but later increased to a final size of $3.3bn, while the accompanying secured and unsecured notes were downsized. 

The new structure triggered one notch downgrades at the senior secured level from both S&P and Moody’s, to B/B2. But such a downgrade is a small price to pay for the benefit of increased pre-payability, sources noted. 

“Borrowers really like that pre-payability feature of the loan market and because the demand in the loan market is fetching better pricing, it checks two important boxes for them,” said a buyside trader. 

Tropicana, currently in the market with a term loan to fund its carveout from PepsiCo by PAI Partners, showed more evidence of strong buyside appetite today as it accelerated the commitment deadline to January 20, from January 25 originally.  


This bullish backdrop is likely to impact the structure of other deals in the pipeline, sources said. This is especially true for LBOs, as sponsors take advantage of loan terms to optimize their financing structure. 

On that note, bankers are giving early looks at the debt backing Bain Capital and Hellman & Friedman’s $17bn buyout of AthenaHealth, sources told 9fin. JP Morgan is leading the term loan portion, while Goldman Sachs is leading the bonds. 

Demand for the TLB—which comprises a $5.75bn funded tranche and a $1bn delayed draw piece—is likely to be strong, despite relatively high first lien net leverage of around 5.3x, the sources said. Total net leverage is in the region of 7.7x, the sources added.

The AthenaHealth deal will be a useful barometer for floating-rate demand. Like Golden Nugget, the incoming sponsors could potentially upsize the term loan portion if subscriptions remain strong, sources said. 

Among the tailwinds for the loan market is the Fed’s newly hawkish tone, which has portfolio managers repositioning themselves both for rising rates and the possibility of a shrinking Fed balance sheet. 

“I don’t think people are that fearful of credit risk at this point,” said David Knutson, head of US fixed income product management at Schroders. “They are fearful of rate risk, and that is putting demand behind leveraged finance and high yield.” 


The release of minutes from the Fed’s December meeting—which revealed its more hawkish approach on rates and asset sales—triggered a sharp selloff in equities last week. The S&P 500 has retraced somewhat but is still down 3% this year to date.

While high yield bonds saw a corresponding selloff, leveraged loans have rallied so far this year as investors have piled in. 

The average yield for bonds in the ICE BofA HY index was 4.57% at yesterday’s close, up from 4.35% on December 31 — but the yield to maturity of loans in the S&P/LSTA index has tightened to 3.81% from 3.88% over the same period. 

US loan inflows jumped to $1.89bn this week, up from $880m the prior week for the biggest weekly inflow since 2013, according to EPFR data. Meanwhile, US high yield bonds saw a $1.16bn outflow, compared with an inflow of $229m the week prior. 

While it’s no surprise that loans are benefitting from the Fed’s messaging around rate hikes, market participants are still assessing the potential impact of the central bank reducing the size of its balance sheet: the so-called Quantitative Tightening. 

The Fed has poured cash into Treasuries and mortgage securities since the start of the pandemic. While those purchases have helped stabilize markets, buysiders are now questioning whether there is enough private-sector demand to take up the slack as the Fed withdraws.

“I think the private sector will step into the void but won’t step in as quickly or as forcefully as the Fed is trying to step out,” said Knutson at Schroders. “That means there will be liquidity challenges.” 

But those pressures are less likely to be felt in loans, sources said, noting that the rising rate environment is likely to buoy retail appetite for the asset class on top of the already robust demand provided by a healthy CLO market. 

“Loans are very insulated from the volatility of other asset classes in general these days,” said a CLO manager. “Even when equities were falling last week, loans were unchanged to up slightly. There is strong investor appetite and they have been resilient.”

AthenaHealth premarkets LBO debt as Golden Nugget wins big in loans

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