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Trlpc euro denominated leveraged loans cheaper than dollars


Feb 25 Global borrowers are using cheaper pricing in the European leveraged loan market to increase the size of euro-denominated tranches and push pricing down on more expensive dollar tranches as companies arbitrage the Transatlantic markets to secure best pricing on large liquid loans. Companies with international operations typically tap the dollar and euro markets simultaneously and play them off against each other to get the lowest pricing possible. Dollars have historically been cheaper than euro-denominated loans, but a repricing in the US market in late 2014 as US regulators put the brake on aggressive loans, means that euros are cheaper."Europe has been more aggressive and this has definitely helped US bankers secure tighter pricing on cross border deals. There was the assumption that you used the dollar market to beat up the euro market but recent deals have seen a reversal and it's the euros which are now beating up the dollars," a European banker said. Austrian packaging group Constantia Flexibles narrowed pricing this week for the second time on its dual-denominated leveraged loan financing backing its buyout by French investment firm Wendel. Constantia's buyout loan double reverse flexed to 375bp on the dollar and euro tranche, having been initially guided at 425bp-450bp. It is unlikely the deal would have priced at 375bp if it was a pure dollar deal, bankers said."There has been a widening in the US so borrowers are looking to raise euros, it is a temporary pricing arbitrage that borrowers are trying to take advantage of. The euros are also dragging the dollars lower, too. It is a short term gain because euros are not as liquid," a second European loan banker said.

Constantia also increased the size of its euro tranche by 100 million euros ($113.55 million), reducing the dollar tranche by the same amount after stronger appetite for the euro portion."A company is actually incentivised to do transactions in euros, and this is the first time in a long time that has happened," said Sandeep Desai, co-head of US leveraged loan capital markets at Deutsche Bank.

EURO BENEFITS Last month, an 841 million euro-equivalent leveraged loan backing telecoms group Altice's acquisition of Grupo Oi's Portuguese operations closed with tighter pricing than initially anticipated. A $500 million tranche was expected to price wider than a 400 million euro tranche and was launched at 500bp-525bp compared to 475bp-500bp, respectively. After being flexed, both the euros and dollars closed at 425bp, with a 1 percent floor. The euro loan came in slightly tighter with a 99.5 OID compared to 99 OID on the dollar loan but ultimately, pricing on the dollar loan was far lower than originally expected, bankers said. The relative strength of the European market versus the US market was also outlined by Dutch software company Exact's $495 million dual-denominated loan backing its buyout by private equity firm Apax Partners.

Some 100 million euros of a $335 million first lien tranche allocated earlier this month but the dollar term loan was put on hold this week after the syndication process faced difficulties. European borrowers have traditionally gone to the US to drive pricing tension, whereas US borrowers have come to Europe to match euro-denominated cashflows. However, Europe's low borrowing rates are making it more appealing for US companies to issue loans in euros, as a tighter US monetary policy will push interest rates up, while quantitative easing in Europe suggests rates will stay low for some time."There is strong potential for this trend to continue as the Federal Reserve looks to tighten policy while the (European Central Bank) steps up extraordinary easing measures," said Benjamin Garber, an economist at Moody's Investors Service. More advantageous pricing and execution in Europe could even see US companies with a global reach pursue a transaction solely denominated in euros."We have not seen that yet, but we feel that is something the market has enough of an appetite to sustain," Desai said. Should this happen, cash-rich European investors are expected to have an enough appetite as the pipeline of new leveraged loans is drying up in Europe, bankers said. ($1 = 0.8807 euros)

U.S. stock futures drop as risk appetites hit, Asia shares resilient


U.S. stock futures dropped but Asian shares were resilient on Monday as investors weighed the near-certain prospect of an interest rate hike in the United States this month against news of China's slower 2017 growth target. Risk appetites also took a hit on rising geopolitical tensions in East Asia, as North Korea fired four ballistic missiles early in the day, while a spat between China and South Korea over missile defense deepened. U.S. President Donald Trump's accusation that his predecessor, Barack Obama, wiretapped him also cast a shadow on U.S. stocks as some investors view his confrontational style as distracting him from his economic agenda. U.S. stock futures ESc1 dropped as much as 0.45 percent, a fairly large move for Asian trade. Japan's Nikkei . N225 dropped 0.5 percent for the day. European shares are expected to follow suit, with spread-betters looking to a fall of 0.3-0.4 percent in Germany's DAX . GDAXI and Britain's FTSE . FTSE. But MSCI's broadest dollar-denominated index of Asia-Pacific shares outside Japan . MIAPJ0000PUS was up 0.4 percent, with most markets in positive territory. South Korean shares also erased earlier losses . KS11 to post small gains."Asian shares were supported in light of U.S. rate hike expectations. Higher resource prices and relatively robust growth in China are underpinning markets," Yukino Yamada, senior strategist at Daiwa Securities. Federal Reserve Chair Janet Yellen on Friday all but confirmed market expectations for an interest rate rise in March, barring any sharp deterioration in economic conditions. U.S. money market futures FFH7 FFJ7 are pricing in about a 90 percent chance the Fed will raise interest rates by 0.25 percentage point at its meeting on March 14-15, with another rate hike fully priced in by September.

"A rate hike is almost a done deal now. So the focus will be on the pace of rate hikes after that. If there's hawkish projections, the dollar could rise further," said Masahiro Ichikawa, senior strategist at Sumitomo Mitsui Asset Management. The dollar dipped 0.3 percent to 113.77 yen JPY= while the euro EUR= eased 0.1 percent to $1.0608. The yuan was little moved so far, fetching 6.8920 yuan per dollar CNH=D4 in offshore trade after China cut its growth target for this year to 6.5 percent, compared to its 2016 goal of 6.5 to 7 percent. Growth in 2016 came in at 6.7 percent. Dampening risk appetite was rising tension over North Korea, which on Monday fired four ballistic missiles, three of which landed in Japan's exclusive economic zone, Japanese Prime Minister Shinzo Abe said. It was the latest in a series of provocative tests by the reclusive state.

The move came just after Japanese media reported on Saturday U.S. Secretary of State Rex Tillerson is due to visit Japan, South Korea and China this month to discuss North Korea on his first trip to the region since he took up his post."This is the worst type of 'geopolitical' risk. It is one that it's hard to hedge against. The 'peace, or lack thereof' risk has been growing for the 10-plus years and is becoming a bigger issue and another reason for caution," said Dan Fuss, vice chairman of Loomis Sayles. Adding to the tensions in the region, South Korea's trade minister said on Sunday that Seoul's responses against discriminating action by China towards South Korean companies will be strengthened. South Korean media said last week Chinese government officials had given verbal guidance to tour operators in China, to stop selling trips to South Korea days after the Seoul government secured land for a U.S. missile-defence system. The Korean won fell 0.4 percent KRW= to five-week lows.

Markets also remain focused on Trump's economic policies and how much of fiscal stimulus would come through during his first term in office."There are worries that Trump may not be able to push through his spending plans, given delay in appointments of key staff. It now looks possible that the next year's budget hardly reflects his agenda," said Masashi Murata, senior currency strategist at Brown Brothers Harriman. The 10-year U.S. Treasuries yield dipped to 2.472 percent US10YT=RR after hitting a two-week high of 2.521 percent on Friday. Oil prices dipped on concern over Russia's compliance with a global deal to cut oil output and China's lower growth target. International benchmark Brent futures LCOc1 fell 0.7 percent to $55.51 per barrel, down 0.3 percent. Figures released last week showed Russia's February oil output was unchanged from January, casting doubt on Russia's moves to rein in output as part of a pact with oil producers last year.