2016 – A Look Ahead in the Middle Market (Third of a Series)

One of the largest dinosaurs ever found debuted last week at the American Museum of Natural History in New York. At 120 feet, Titanosaur is so long that its head sticks out of the exhibit hall. The paleontologist who uncovered the bones knew he was on to something unusual. “Everything was extremely large,” Dr. Diego Pal remarked.

The same may not be said of transactions in the leveraged loan market today. Volatility that kicked up last August has persisted into the new year giving pause to big deal arrangers. Cash departing from retail loan funds has sapped vigor out of the buy-side, making it challenging for syndicators to judge investor appetite.

While well-liked, moderately sized credits such as 1-800-Contacts and Pinnacle Foods saw pricing tighten, Petco‘s $2.5 billion term loan spread widened 25 bps. This cautionary tone will persist for other jumbo financings slated to launch 1Q.

Middle market transactions, on the other hand, are increasingly club affairs among non-bank lenders less exposed to market volatility and bank regulation. That allows debt to ebitda to push past the six times total set by leveraged lending guidance above which loans are deemed to be criticized.