A software company that struggled to raise money last year just nabbed $4 billion from investors – and it's a case study in the 'insatiable' appetite for risky debt deals

• As debt increased for Ireland’s ION Group, investors balked at its previous attempts to raise loans.
• Now, ION is nearing $4 billion in transactions to refinance debt held by its companies.
• Investors are piling into leveraged loans eyeing greater returns amid low interest rates.
• Visit the Business section of Insider for more stories.

ION Group, an Irish-headquartered data and software company that provides technology for trading, has turned the tide with an investor base that until recently balked at some of the firm’s attempts to raise money.

With interest rates at rock bottom, however, deep-pocketed investors are increasingly looking for returns in the $1.2 trillion US leveraged loan market, a corner of the capital markets where some of the riskiest corporate investment plays live.

Despite the inherent risks in leveraged loans, investors have flocked to this asset class as returns outweigh those offered in safer areas of capital raising, such as highly-rated bonds. As such, the leveraged loan market remains a hot destination for riskier companies, such as ION, to raise money for operations, or for private equity-owned businesses to pocket handsome dividends.

ION’s opportune timing comes amid a deluge of new transactions across the debt capital markets. Last March’s decision by the US Federal Reserve to support markets with bond purchase programs has kept borrowing costs low and enabled companies to raise cheap debt to aid them through the novel coronavirus.

Investors, backing the Fed, have clamored for these debt deals, which pushed borrowing costs lower and depressed yields. ION, like many other risky, low-rated borrowers, have seized their chance to refinance debt at a time when buyside demand outweighs the supply of new transactions.

“The world is awash with liquidity, [interest] rates are low. We are at one of the greatest times to [raise money] in the high-yield [bond] or loan markets,” according to a managing director at an investment bank that spoke on the condition of anonymity.

Indeed, investors have already piled into $273 billion of US leveraged loans this year, while US high-yield bond sales have reached $97 billion so far in 2021, according to data from Dealogic. And last year, borrowers raised $900 billion in US leveraged loans, while US high-yield bonds hit $426 billion.

Opportunity knocks for companies looking to reprice loans

For ION, this burgeoning investor demand has presented the company with an ample opportunity to refinance roughly $4 billion in loans held by its entities ION Analytics and ION Corporates.

In February, ION Analytics raised a $1.9 billion loan that enabled the company to push out its repayment schedule as far as 2028.

This month, ION Corporates launched a transaction to refinance debt denominated in US dollars and euros, according to a banker familiar with the financing.

ION Corporates obtained enough demand to justify increasing the deal by $200 million to $2.1 billion on March 5. The additional proceeds will pay the company’s shareholders a long sought-after dividend, according to the banker. It pays investors an interest rate of 3.75% plus the London Interbank Offered Rate (Libor), a common benchmark reference rate for loans.

Not only do these loans kick the repayment can down the road to 2028 from 2025. The transaction for ION Corporates marks a significant saving as it is currently paying 4.25% in interest plus Libor on its existing loan.

“Investors need to find yield. But supply of new deals is not there when compared to demand,” said one portfolio manager that is familiar with ION’s loans. “Companies that can reprice or refinance existing loans are taking their chance to lock in lower rates for the coming years.”

In fact, repricing transactions – when a borrower returns to the loan market to revise the cost of its existing loan – already reached about $102 billion last month, according to S&P Global Market Intelligence unit LCD.

This is just shy of the roughly $115 billion to $120 billion in repricing activity for 2020, and some managers believe this year’s repricing and refinancing could increase on last year’s tally.

“The repricing wave might feel like it’s almost over. But if the high-yield [bond] market doesn’t get into a ‘risk-off’ mode, you could see another repricing wave in six months to the extent interest rates creep higher,” said Michael Marzouk, a managing director and portfolio manager for bank loan strategy at Pacific Asset Management.

Credit Suisse led the proceedings for ION Corporates’ new transaction. A spokesperson for Credit Suisse declined to comment, while ION Group did not respond to questions before press time.

ION’s long road to winning over investors

Despite ION’s recent fortunes, it has not always been plain sailing for the data and software firm. In the last two years, ION Analytics and ION Corporates have frequented the syndicated loan market with mixed results.

In September 2019, the company locked in $1.75 billion in leveraged loans with investors that it is refinancing with this month’s new deal. But that deal took months to put together as investors wanted the company to reduce its debt and improve some terms of the credit agreement to alleviate buyside risk, Reuters reported at the time.

ION Analytics, too, faced challenges before arranging $1.9 billion in loans in February.

Last November, ION Analytics sought $1.85 billion from loan investors, but withdrew the deal from the syndicated market due to volatility surrounding the uncertainty of the US presidential election.

Now, not only have investors grown comfortable with ION’s companies’ credit metrics, it’s clear fund managers are increasingly hunting down the credit spectrum for higher returns.

“The quality of deals are not terrible, these are solid credits, but a lot of the supply is refinancing. Investors want to try and build their [portfolios] but right now there is not enough for the insatiable appetite,” said the portfolio manager familiar with the loans.

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