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Octus on Credit: Supply begins to outpace demand, driving greater selectivity
Mark Fischer, Head of Financial Research
Leveraged loan issuance lagged high yield bonds last week amid contagion fears from First Brands, Tricolor, and fraud allegations by two regional banks on commercial real estate loans. Investors pushed back on former private credit borrower Metropolis Technologies, whose $1.1 billion loan priced 100 basis points wide at SOFR + 525 bps (versus SOFR + 425-450 bps talk) on questions about its sector and financials.
High-yield bond and leveraged loan funds saw their largest outflows in six months, per Bank of America. Octus reporter Katherine Schwartz noted rising supply may cause investor “indigestion.” Supply is outpacing demand for the first time in months, giving investors leverage to be selective and push back on pricing.
This comes as LBO and M&A activity accelerates, threatening to increase supply and reviving April’s “hung deal” fears around tariff uncertainty. Octus estimated 25% of September loan origination, excluding repricings, targeted LBOs. New deals keep launching in October, including large transactions like Electronic Arts and Hologic.
Yet few LBOs have priced. A Santander-led bank group retained $1.2 billion in second lien debt of a $2.7 billion package for Thoma Bravo’s Verint buyout. The first lien’s OID widened to 95 from 97-98 talk.
Others fared better: Madison Dearborn’s NFP Wealth and Apollo-American Securities’ Trace3 both priced tight.
Two refinancings were pulled last month on weak demand: Mallinckrodt-Endo‘s $1.5 billion loan and Nouryon‘s dual-currency $5.8 billion facility. Neither attracted sufficient investor interest, according to sources Octus spoke to.
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