Leveraged-loan issuance in the U.S. more than doubled this year, as private-equity firms sought funds for buyouts and borrowers refinanced debt amid a rebound from the worst financial crisis since the Great Depression.
More than $369 billion of loans were raised as of Dec. 28, led by financing for the purchases of Tomkins Plc and Burger King Holdings Inc., up from $170 billion in 2009, according to data compiled by Bloomberg. Interest rates fell to 3.91 percentage points more than the London interbank offered rate on average, from 10.28 percentage points at the end of 2009, according to Standard & Poor’s Leveraged Commentary and Data.
Cheap financing will bolster the loan market again in 2011, as buyout firms seek cash for acquisitions and borrowers refinance some of the more than $288 billion in bank debt due in the next four years, data from Barclays Capital and S&P LCD show. The return of collateralized loan obligations should also create demand as investors seek out higher returns while the Federal Reserve keeps interest rates near zero.
“You have this great set of fundamentals that are pushing people into bank debt and you have yield issues driving people into high yield, which has created a credit market that is absolutely phenomenal,” said John Eydenberg, global head of financial sponsors coverage at Deutsche Bank AG in New York, where he advises private equity firms. “The rocket fuel that powers financial sponsors is the credit markets.”
Leveraged-Loan Returns
The S&P/LSTA U.S. Leveraged Loan 100 Index returned 9.35 percent this year as of Dec. 28, following last year’s 52.23 percent. In 2008 the index lost 28.2 percent. Gains for 2009 compare with 14.7 percent for junk bonds, based on the Bank of America Merrill Lynch U.S. High Yield Master II Index.
Leveraged loans and junk bonds are typically rated below BBB- by Standard & Poor’s and less than Baa3 at Moody’s Investors Service.
Elsewhere in credit markets, Allstate Corp. sued Bank of America Corp. and its Countrywide mortgage unit over $700 million in residential mortgage-backed securities that the insurance company purchased. Brightstar Corp., a distributor of wireless communication services, obtained a $500 million line of credit and the cost of protecting U.S. corporate bonds from default was little changed.
Allstate Lawsuit
Allstate said Countrywide misrepresented the investments and “was singularly focused on increasing its market share,” according to the complaint filed in federal court in Manhattan.
The company, based in Northbrook, Illinois, said in the filing that the investments suffered “drastic and rapid loss in value” resulting from the poor quality of the loans underlying them. The suit seeks unspecified damages.
Brightstar took out a five-year loan that will pay 2.25 percentage points more than Libor, according to a statement distributed today by PR Newswire. Libor is the rate banks charge to lend to each other.
The refinancing was the second part of the company’s capitalization, Dennis Strand, executive vice president and chief financial officer of Miami-based Brightstar said in the statement. Brightstar sold $250 million of six-year bonds on Nov. 23.
The Markit CDX North America Investment Grade Index rose 0.06 basis point to 85.8 as of 6:25 p.m. in New York after reports showed retailers had their best holiday sales in five years while home prices fell more than forecast, according to Markit Group Ltd. Investors use the index to hedge against losses on corporate debt or to speculate on creditworthiness.
Holiday Sales Jump
U.S. retailers’ 2010 holiday sales jumped 5.5 percent to $584 billion as shoppers snapped up clothing and jewelry, said MasterCard Advisors’ SpendingPulse, which measures purchases by all payment forms. the U.S. recovery accelerates into the new year.
Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
Bonds from Fairfield, Connecticut-based General Electric Co. were the most actively traded U.S. corporate securities by dealers, with 45 trades of $1 million or more, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
The extra yield investors demand to own U.S. corporate bonds instead of similar-maturity government debt narrowed 1 basis points to 1.66 percentage points, according to Bank of America Merrill Lynch’s U.S. Corporate Master Index. Yields averaged 4.2 percent.
In emerging markets, the extra yield investors demand to own corporate bonds rather than government debt rose 1 basis point to 237 basis points, according to JPMorgan Chase & Co. index data. Spreads have dropped 35 basis points this month.
Shrinking Interest Margins
Shrinking interest margins translated into interest savings of almost $6.5 million this year on every $100 million of loans borrowed, according to data from S&P’s LCD. While up from 2009, issuance remains below the record $879.4 billion reached in 2007. Of the amount raised this year, $31 billion was used to pay dividends to company owners, according to data compiled by Bloomberg and Deutsche Bank, which cited S&P LCD.
“I expect issuance to be pretty robust next year,” Greg Stoeckle, managing director and head of Invesco Ltd.’s $18 billion bank-loan business, said in a telephone interview.
Loan Fund Inflows
Investors moved into the loan market this year as prices of the debt rose and the global default rate dropped to 3.3 percent in November from a high of 13.55 percent in November 2009, according to Moody’s Investors Service. Loan prices improved 5.6 percent this year, trading at 92.68 cents on the dollar Dec. 28, as measured by the S&P/LSTA U.S. Leveraged Loan 100 Index.
More than $14 billion flowed into leveraged-loan funds in 2010, according to AMG/Lipper data as cited in a Dec. 16 Bank of America report. GSO Capital Partners LP, which is the credit investment arm of Blackstone Group LP; and Goldman Sachs Group Inc. were among firms this year that said they were raising funds to invest in loans.
The most interesting trend “has been the influx of cross- over investors and new investors coming in and paying attention to the space, not as an opportunistic play, which I think was the story in 2009, but as a core allocation,” Stoeckle said. New investors include pension funds, traditional fixed-income bond accounts and some hedge funds, he said.
Broad Buyer Base
Insurance companies, prime-rate funds and separate-managed accounts have also expressed interest, said Tim Broadbent, head of Americas leveraged-loan syndicate at Barclays Capital in New York.
“It’s a pretty broad and diversified base of buyers that is likely to continue,” he said in a telephone interview.
New CLOs, a type of collateralized debt obligation that pool high-yield, high-risk loans and slice them into securities of varying risk and return, increased this year. More than $3.4 billion were issued in the U.S., more than double 2009’s $1.22 billion volume though still below the 2007 peak of $91.1 billion, Bloomberg and
Morgan Stanley data show. Morgan Stanley predicts issuance of $15 billion to $20 billion in 2011.
Apollo Global Management LLC and GSO are among managers that completed CLOs. Spreads on the highest-rated portion of the debt, the slice rated AAA by S&P, were 215 basis points more than Libor as of Dec. 16 after widening to as much as 725 basis points in April 2009. Spreads were as narrow as 23 basis points in 2007, according to Morgan Stanley data.
CLO Market
The market for CLOs has “cracked open again but it is not doing so with any tremendous volume and most aggressive forecasts are for $15 billion of issuance,” Stoeckle said. “When you think of that in overall market size, that is still pretty small.”
The increased loan issuance will help fund buyouts as private-equity firms sit on the sidelines with about $485 billion of uninvested capital, according to data from PitchBook Data Inc.
3G Capital announced in September it was buying Burger King for $4 billion, while Canada Pension Plan Investment Board and Onex Corp. said in July they were purchasing Tomkins. KKR & Co., Vestar Capital Partners and Centerview Partners plan to raise as much as $4.6 billion of debt to back their $5.3 billion buyout of Del Monte Foods Co., according to a regulatory filing.
“The capacity for the market on the LBO side just isn’t there to do the $30-, $40-, $50 billion dollar deals,” said Deutsche Bank’s Eydenberg. “The sweet spot in the market is in the single digits and the biggest deal of the year was Del Monte, which didn’t crest a double-digit billion. I do think 2011 will hold a $15 billion deal.”
Bank of America remains the top arranger of leveraged loans, increasing its share to 19 percent as of Dec. 28 from 16.5 percent in 2009, Bloomberg data show. JPMorgan is second with 13.9 percent of the market.
To contact the reporter on this story: Kristen Haunss in New York at khaunss@bloomberg.net
To contact the editor responsible for this story: Faris Khan at fkhan33@bloomberg.net
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