According to an article in Leveraged Finance News, May was the first month in 2012 in which more borrowers were pressured to improve pricing on loans during syndication than others that were able to reduce borrowing costs from those contained in the initial loan proposal. Deteriorating confidence among loan market investors is responsible for this turnabout, caused by the ongoing European debt crisis and disappointing economic growth around the world. The trend has continued with pricing widening on several transactions launched in June.

In May, 19 first-lien institutional loans executed had upward pricing flexes, while only six were reverse flexed. Of the deals with upward pricing flexes, eight of 19 were financing M&A or leveraged buy-out (LBO) transactions, five were refinancings, five were dividend recapitalization deals and one was an IPO-related transaction.

Pricing flexes were achieved using a combination of:

In acquisition financing transactions, borrowers tend to be more tolerant to accept pricing increases to achieve a successful syndication because the underlying acquisition has a long timeframe, sometimes involving months of due diligence and negotiation. As a consequence, sponsors and strategic buyers are less likely to abort the related financing than agree to pay increased pricing if the acquisition remains economically viable.

By contrast, dividend recaps and refinancings are far easier to put on hold pending a return of more positive market sentiment. However, in the current low interest environment, even borrowers in dividend recap and refinancing deals seem prepared to accept modest increases in pricing during syndication when necessary to obtain sufficient commitments to close their loans. First-lien institutional loans that flexed up in May rose by an average of 84 basis points, leaving average yields on all new first-lien institutional loans rose at 7.27% in May up from below 7% in April and its highest monthly level since November 2011.

For more information on loan pricing, market flex and reverse flex see Practice Notes, Sponsor/Lender Negotiating Issues in Acquisition Finance and Fee Letters Overview: Lending.