US and European LevFin Primary Markets Turn Sour as Buy-Siders Become Credit Selective, Demand Attractive Pricing

Leveraged finance dealmakers across the United States and Europe have had a difficult time pricing primary deals in October as buy-side participants have become more credit selective as rising interest rates rattle market conditions.

A number of leveraged loan deals have priced wider than initial price talk with more lender-friendly covenant language as investors ask arrangers for more protection in new issuance. In some cases, deals have been postponed or pulled altogether.

Deals for Volta Infrastructure, Attindas Hygiene Partners and Grant Thornton, among others, all priced with more lender-friendly terms after investors balked from riskier deals.

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The pushback reflects a shift in the balance between supply and demand, as a growing pipeline of new-money transactions gives investors greater flexibility to differentiate between credits, according to a leveraged finance banker. While demand has previously surpassed supply of new-money deals, the market is becoming more balanced, allowing investors to demand additional concessions on weaker credits.

Changing market conditions have also prompted some issuers to delay planned refinancings, said the banker, as higher Treasury yields and weaker credit spreads drive up borrowing costs. U.S. high-yield spreads have widened roughly 50 bps in recent weeks, currently at 327 bps, as of Oct. 21, according to ICE BofA data, while the SOFR rate currently sits at 3.88%, a roughly 7% increase from where it was in the middle of September, according to Federal Reserve Bank of New York data.

Riskier rated deals have not been the easiest to get done this month, said another leveraged finance banker regarding the current appetite from investors. A potential recap deal for Ares-backed LaserAway received lackluster interest during premarketing, Octus reported, with one source noting that investors pushed back on funding a dividend payout, given rocky market conditions.

Elsewhere, Attindas Hygiene Partners had to make numerous changes to its loan backing its acquisition of Activ Medical Disposal after facing lukewarm reception from investors, including downsizing the loan and adding tighter liability management exercise protections. Grant Thornton Advisors abandoned both its euro and Australian dollar-denominated loan tranches from its bond and loan offering after investors flagged the aggressive nature of the financing package, Octus reported.

One area of particular concern is the performance of CCC rated debt, which has started to diverge from higher-rated credits of the high-yield bond market after previously trading more closely in line with single B and BB credits, said the first banker. The widening gap has raised questions about whether weakness at the lowest end of the ratings scale could eventually spill over into higher-quality credits, prompting a broader repricing.

Companies that had previously expected to refinance outstanding debt at yields of about 5.75% are now facing costs at least 100 bps higher, the first banker noted. Although waiting would expose issuers to further rate increases, some are opting to postpone deals in hopes of favorable conditions. Audio-video technology provider AVI-SPL pulled its $690 million leveraged loan from the market after the Wells Fargo-led deal, which would have refinanced the company’s private debt, failed to price by its deadline, Octus reported.

In Europe, similar dynamics are playing out in the primary market, including Circet pulling its €500 million high-yield bond because of adverse conditions. One European investor noted that there has been less buy-side appetite for new deals from any company that has reported less than impressive earnings in the last few months. Well-liked issuers are still pricing OK, the European investor added, but riskier-rated companies are selling off more sharply than before.

In addition to elevated yields, the high-yield bond market is digesting the massive volume of bonds launched in September, including Paramount’s $12.4 billion-equivalent notes and SoftBank Group’s over $11 billion dollar and euro-denominated notes. High-yield bond deals supporting M&A and urgent refinancings for near-term maturities can still find demand in the current market, another investor said, but issuance is expected to slow considerably compared with the steady wave of refinancings seen in previous months.

A recent selloff in AI-infrastructure-related credits and growing fatigue over data center debt financings have also added to the broader uneasy sentiment across the broader leveraged finance market.

Last week, CoreWeave’s unsecured notes traded into distressed territory, while Volta Infrastructure had to offer wider pricing, steeper OID and stronger covenant protections to clear its $5 billion deal. Several bond financings supporting AI infrastructure are still expected to launch this year, but premarketing efforts have stalled for many amid the turbulent market conditions.

Despite the volatility, the primary market remains functional, with deals finding buyers, albeit at wider spreads and greater risk premiums, said the first banker. Capital remains available across the leveraged finance market, though both banks and investors are becoming more disciplined in their approach to risk.

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