Companies with junk credit ratings are taking advantage of favorable market conditions to negotiate improved loan agreements, significantly lowering the additional interest they pay over benchmark rates.
Two big forces are driving this wave of repricings. First, credit markets are strong despite worries about AI disruption and the war in Iran.
Chris Bonner, who is in charge of Goldman Sachs' leveraged finance operations in the Americas, said: "There are two big drivers. One is that market conditions for credit are strong. The other is the supply-demand imbalance."
A slowdown in leveraged buyout activity has further exacerbated the supply-demand imbalance. With fewer new acquisition loans to underwrite, lenders have excess capacity to refinance and reprice existing deals, giving borrowers strong negotiating power to reduce their interest costs.
The favorable conditions are also reflected in the broader loan market, where collateralized loan obligations (CLOs) have seen robust issuance. This strong demand from CLO investors gives borrowers additional leverage to negotiate lower rates, as lenders compete to deploy capital into high-yielding assets.
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The typical repricing reduces interest margins by 25, 50, or 75 basis points. In May, Skechers, the footwear firm controlled by 3G Capital, reduced the interest margin by 50 basis points on loans denominated in both dollars and euros. RadNet, a diagnostic-imaging specialist, repriced $959 million of existing loans and lowered the spread to 200 basis points. Additionally, the company secured $250 million in new capital, exceeding its initial target by $50 million.
Celsius Holdings, the energy-drink maker, is repricing its loans for the second time in months. It originally set a margin of 250 basis points last September. Now it is targeting a new rate of 175 or 200 basis points.
According to Sabrina Fox, who runs Fox Legal Training and specializes in leveraged finance, borrowers are "firmly in the driving seat - they're cutting interest costs across portfolio companies."
The fees banks charge for these repricing deals are much thinner than for buyout loans. In the US, a typical fee is up to $1 million. In Europe, it can be as low as €250,000 (about $285,825). By contrast, banks earn about 2.5% for underwriting a leveraged buyout loan.
So far this year, $289.3 billion worth of CLOs have been issued across Europe and the US. Additionally, 450 CLOs are currently in the warehousing stage, which comes before a new CLO is formed, according to a Barclays report dated July 6. Collateralized loan obligations are a major source of demand for leveraged loans; the robust issuance this year reflects strong investor appetite for higher-yielding assets, which in turn gives borrowers more leverage to reprice.
Danielle Poli, a senior investment professional at Oaktree Capital Management who oversees portfolios, stated: "While repricings can pressure portfolio yields, they are also the sign of a healthy market and strong demand for credit."
Trip Morris, who jointly leads leveraged finance at Wells Fargo, noted that when firms seek to reduce their borrowing costs by more than the typical 25 or 50 basis points, it often indicates the initial deal was struck during tough market conditions.
Hadrien Servais, leveraged finance partner at Simpson Thacher & Bartlett, urged caution: "For lenders, the key is to remain selective and disciplined. Repricings can make sense where the credit has performed well, but tighter pricing should still be assessed against the underlying fundamentals."
The current repricing wave reflects both strong credit demand and a lull in buyout activity, allowing low-grade borrowers to renegotiate terms and reduce financing costs while lenders compete to deploy capital.
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