A 16% Leveraged Loan Is Painful But Necessary

(Bloomberg Opinion) -- Backed into a corner by the coronavirus pandemic, Texas billionaire Tilman Fertitta is rolling the dice in the leveraged-loan market.

Fertitta’s empire includes Golden Nugget casinos and restaurants under the Landry’s Inc. umbrella like Bubba Gump Shrimp Co., Morton’s The Steakhouse and Rainforest Cafe. Needless to say, the economic shutdown across America has wreaked havoc on all of those businesses. In a gambit to stockpile extra cash, Landry’s this week is dangling an unprecedented all-in yield of at least 16% to entice investors to buy into a new $250 million loan. It would be the first successful leveraged-loan deal in almost a month, assuming it draws enough commitments on Thursday.

It already looks as if the offering arranged by Jefferies Financial Group Inc. will make it past the finish line. Bloomberg News’s Jeannine Amodeo and Davide Scigliuzzo reported Tuesday that order books are already double the size of the proposed loan. That checks out: As I noted last week when Carnival Corp. initially floated bonds yielding close to 13%, bankers involved in these sales have little reason to propose an interest rate that won’t clear the market. Indeed, despite being in a line of business directly harmed by the spreading coronavirus and in desperate need of cash, Carnival priced its bonds 100 basis points lower than the initial level.

The Landry’s deal appears to be benefiting from a combination of the highest spread ever on a first-lien loan not tied to bankruptcy and renewed risk appetite broadly. For as risky as Carnival might seem, it at least technically had investment-grade ratings, and its bonds had the unusual benefit of being secured by a first-priority claim on its assets. By contrast, Moody’s Investors Service cut Golden Nugget’s “corporate family rating” on March 24 to B3 from B2, six steps below investment grade.

That seems warranted given the company’s struggles. Here’s Bloomberg’s Scigliuzzo and Amodeo on how Landry’s has fared so far during the coronavirus outbreak:

The pandemic has brought the travel and leisure industry to a near standstill, leaving Fertitta’s businesses shuttered and burning cash while tens of thousands of his employees have been furloughed.

The company has already drawn $300 million of existing credit lines in full and Fertitta is injecting $50 million of his own cash into the business, said one of the people, who asked not to be named because the details are confidential.

...

Fertitta sees the new loan as an expensive insurance policy in the event that none of these businesses can reopen before the end of the year, the same person said.

In other words, this leveraged loan is painful, but necessary, for a company that’s directly in the crosshairs of this virus-induced economic slowdown.

It won’t be the last such business to try to wade into the riskiest parts of the debt markets looking for financing. Following in Carnival’s footsteps, Wynn Resorts Ltd., which had drawn down almost all of its $850 million revolving credit line, plans to issue $350 million of junk bonds, in what would be the first “unsecured” deal since the high-yield market sprung back to life last week. Viking Cruises is also considering a new $500 million junk bond while its ships are docked.

For both investors and borrowers alike, the most crucial question might be whether the rift persists between high-yield debt and leveraged loans. Junk bond funds experienced a record inflow of $7.09 billion for the week ended April 1, according to Refinitiv Lipper data, indicating that the widest yield spreads since the last recession were enough to lure buyers. By contrast, loan funds continue to face withdrawals, with investors pulling another $528 million during the same period. Aside from a few weeks here and there, loan funds have been hemorrhaging cash nonstop since late 2018, when risk assets tumbled and forced the Federal Reserve to stop raising interest rates.

Given that backdrop, some investors are skeptical that the Landry’s offering indicates the leveraged-loan market is on the brink of a comeback. A $690 million deal for Mallinckrodt was scrapped last month after attempting to launch, at the time marking the 18th loan deal to be pulled or postponed in 2020. Leveraged loans are trading at about 83 cents on the dollar, based on the S&P/LSTA Leveraged Loan Index. That’s up from as little as 76 cents but still a ways away from the 97 cents at the start of the year.

An unidentified syndication manager told Reuters flat out that it “will not be a harbinger of the loan market reopening. With secondary levels still, on average, in the mid-80s, accounts will likely continue to focus their attention on buying names that they know at historically attractive levels.”

For Fertitta, whose net worth dropped by about a third at one point a couple of weeks ago, having his deal slip through the cracks at any price would be a win. He shares that sentiment with the leveraged-loan market as a whole. “We are trying to survive,” he told Bloomberg’s Scigliuzzo. “I have enough liquidity to ride this out. I can’t go forever but I can go for a few months.”

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Brian Chappatta is a Bloomberg Opinion columnist covering debt markets. He previously covered bonds for Bloomberg News. He is also a CFA charterholder.

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