Chief financial officers hate second-lien loans. They’re really expensive — about 2 percentage points more, give or take, in annual interest-rate costs than traditional first-lien debt.

Which explains companies’ sudden rush to take advantage of the booming leveraged loan market and issue new first-lien debt — at falling yields, no less — to help pay down the pricier obligations.

Among those reaping the savings are 1-800 Contacts Inc. and human resources software company UKG Inc. Both are replacing lower-ranked loans (which get paid later in the event of bankruptcy) with higher priority ones, saving themselves tens of millions of dollars in interest over the life of the debt. More than a dozen companies did something similar last month, and market watchers say it’s only getting started as additional firms look to swap out expensive loans coming due in the next couple years.

“It’s a sign of things that were unthinkable 12 months ago, but where people are happy to put pen to paper in 2024,” said Andrzej Skiba, head of BlueBay US fixed income at RBC Global Asset Management. “Any creative ways to address the maturity wall in 2025 will be considered. When the music is playing, people get creative.”

John Graham, chief executive of 1-800 Contacts parent company SeekWell, said via email that paying off the company’s second-lien loan demonstrates the firm’s growth and added flexibility to appropriately manage its interest expense.

A representative for UKG didn’t respond to a request seeking comment, while Hellman & Friedman, its private equity owner, declined to comment.

While companies usually prefer to avoid taking on costly second-lien debt, sometimes they have little choice. Investors, for example, might not be willing to lend as much first-lien debt as a corporation is seeking to help fund an acquisition.

But with leveraged loan demand surging to start the year as interest from collateralized loan obligations — the biggest buyers of the debt — ramps up, firms see an opening.

UKG sold an upsized $5.385 billion leveraged loan Wednesday to refinance its first-lien term loans and partially refinance second-lien debt. KKR-backed 1-800 Contacts sold an upsized $565 million loan to pay back a $315 million second-lien loan and fund a distribution to its shareholders. The direct-to-consumer company was also among the many borrowers in the market to reprice their first-lien debt, negotiating the removal of a leverage-based interest-rate step down feature. A spokesperson for KKR declined to comment.

Caliber Collision Inc. also retired second-lien debt in January, using part of the proceeds from just under $4 billion in bond and loan sales.

First « 1 2 » Next