Rlpc recovery ratings take more prominence on leveraged loans← Homepage
Nov 3 An increasing number of banks are taking account of recovery ratings when structuring European leveraged loans as more CLOs place greater emphasis on the metric when committing to a deal, banking sources said. A growing number CLO 2.0s use S&P's recovery rating as a benchmark of whether to invest in a deal and if so, by how much. The rating ranges from one, which has at least 90 percent rate of recovery if a credit defaults to six, which has a 10 percent or less chance of recovery. The importance some new CLOs have placed on the rating has taken a number of bankers by surprise."Relatively suddenly, recovery rating has become the key metric investors are focused on, almost at the exclusion of everything else. It is something that plays a big importance when structuring a deal to sell," a syndication head said. A leveraged loan banker added: "A recovery rating is a far more important metric than it ever was before. Investors do not just look at a corporate rating in isolation but the recovery rating is very important."
German plastics maker Styrolution closed a 1.05 billion euro-equivalent (1.31 billion US dollar) term loan to refinance existing bonds and finance Ineos' US$1.5 billion purchase of a 50 percent stake in the business it did not already own from German chemicals maker BASF. In addition, there was a 200 million euro second-lien PIK toggle loan, fully subscribed to by Ineos. Pricing on the term loan was adjusted to make it more attractive to investors in a volatile market but ultimately it closed successfully after receiving a number of commitments from lenders. Ratings are B2/B for the corporate and B2/B1 for the first-lien with a three recovery rating.
Styrolution secured a number of commitments from investors that had previously turned the deal down when it was originally launched via Citigroup and Credit Suisse in July. The original deal, which had a recovery rating of four, was withdrawn in August after a failed syndication process. Investors have far more limited baskets for deals with a recovery rating of four. THE MAGIC NUMBER
When it relaunched in October via Barclays and JP Morgan, the deal's structure was specifically tweaked with the goal of improving the recovery rating. The second lien was added to the deal, enabling it to get a better recovery rating of three."A recovery rating below three is not good. Recovery ratings are on the radar more now because new CLOs more aligned to it," a second leveraged loan banker said. A recovery rating of three gives a 50-70 percent chance of recovery. S&P made changes in September to enhance the transparency and clarity of the category to state whether a business is at the top or bottom of the band."Historically investors have focused on the probability of default. People are realising that by assessing the recovery prospects if a loan were to default will enable them to pick assets much better. It is about bloody time people are focusing on this," a source said. (1 US dollar = 0.8007 euro)