Nov. 6 (Bloomberg) -- RehabCare Group Inc., the biggest U.S. rehabilitation-services provider, asked lenders this week for a $625 million leveraged loan to finance an acquisition as banks show signs of a growing willingness to take on risk.

Bank of America Corp., Royal Bank of Canada and BNP Paribas are arranging a $500 million term loan and a $125 million revolver to finance the transaction, RehabCare Chief Financial Officer Jay Shreiner said today in an interview. Also this week, JPMorgan Chase & Co. and Morgan Stanley separately pledged to finance as much as a combined $5.35 billion for two acquisitions valued at about $8.6 billion, according to regulatory filings.

The Federal Reserve said Nov. 4 it would keep interest rates near zero for “an extended period” to fuel lending as the economy recovers from the worst financial crisis in seven decades. Private-equity buyouts and speculative-grade corporate acquisitions are growing in size as banks, able to borrow cheaply and facing demand for new debt from investors, are starting to once again extend credit for takeovers.

“There is definitely appetite from both investors and the banks,” said Michael Anderson, high-yield credit strategist at Barclays Capital. “The banks are feeling more comfortable about investor demand, which gives them greater confidence that they’ll be able to syndicate the loans.”

The market for mergers and acquisitions is thawing and there’ll be more LBOs and strategic corporate deals as confidence in the economic recovery takes hold, Anderson said today in an interview from his New York office. During the last six months, banks took less risk than investors, who sought deals to deploy cash from high-yield bond sales paying down leveraged loans, he said.

Denbury Commitment

The S&P/LSTA U.S. Leveraged Loan 100 Index climbed 42 percent to 84.28 cents on the dollar as of yesterday, after sinking to an unprecedented low of 59.2 cents on Dec. 17. The index rose to as high as 86.07 cents on Sept. 24.

For its purchase of Houston-based Triumph Healthcare LLC, RehabCare will pay interest at 4 percentage points more than the London interbank offered rate on its credit facility, Shreiner said. The term-loan portion also will have a 2 percent floor, he said.

“The markets have definitely opened up and we had no issues getting committed financing for the transaction,” Shreiner said. Lenders have until Nov. 19 to submit commitment responses and the company expects to complete the deal on or before Dec. 1, he said.

Denbury Resources Inc. received a $2.85 billion commitment from JPMorgan to finance its purchase of Encore Acquisition Co. in the biggest U.S. oil and natural-gas takeover of 2009, according to a Nov. 4 regulatory filing. The transaction consists of a $1.6 billion revolving credit line and a $1.25 billion bridge facility.

Largest Loans

Three days earlier, Morgan Stanley agreed to back CF Industries Holdings Inc.’s hostile bid for Terra Industries Inc. with a $1.3 billion credit facility and a $1.2 billion bridge loan 2.5 billion, according to a commitment letter CF Industries attached to a Nov. 3 regulatory filing.

Morgan Stanley is offering to provide CF with a $1 billion term loan and a $300 million revolving credit line with interest rates 3.75 percentage points more than Libor. Both five-year loans will have a Libor floor of 2.25 percent, according to the letter.

The two leveraged-loan commitments are the biggest this year after the $3.2 billion arranged in September by six banks including JPMorgan and Morgan Stanley to back Warner Chilcott Plc’s acquisition of Procter & Gamble Co.’s prescription-drug unit, according to data from Standard & Poor’s Leveraged Commentary and Data and Bloomberg.

Brian Marchiony, a spokesman for JPMorgan, and Morgan Stanley spokeswoman Alyson Barnes declined to comment.

‘Prudent’ Lending

Bank financing to back leveraged buyouts and speculative- grade company takeovers picked up two months ago, climbing to $3.84 billion, and reached its 2009 high in October with $3.94 billion, according to S&P LCD and Bloomberg data.

“Lending is still at a more prudent level,” Pri de Silva, banks and brokers analyst at debt research firm CreditSights in New York, said Nov. 4 in an interview. “Market capacity declined following the demise of Lehman, Bear Stearns and also Merrill Lynch.”

Lending to junk-rated companies plummeted 88 percent to $99.9 billion in 2009 from a record $797.1 billion two years ago, when banks competed to finance the biggest buyouts, according to Bloomberg data. High-yield, high-risk debt is rated below Baa3 by Moody’s Investors Service and less than BBB- by S&P.

U.S. unemployment climbed to a 26-year high of 10.2 percent as companies cut 190,000 jobs in October, the Labor Department said today. The drop in payrolls exceeded the median forecast of economists surveyed by Bloomberg News by 15,000 even as the economy expanded last quarter at a 3.5 percent pace.

Borrowing Costs

The Fed this week cited mounting unemployment as one of the reasons to keep interest rates low. The U.S. government and central bank lent, spent or guaranteed $11.6 trillion since the beginning of the economic crisis to bolster the economy and the financial system, Bloomberg data show.

Borrowing costs for banks fell to all-time lows as fiscal and monetary policies took hold. Three-month Libor, the rate banks charge to lend to each other, was set at a record 0.27 percent today.

The benchmark rate jumped to as high as 4.82 percent in October 2008 after the credit markets froze following the collapse a month earlier of Lehman Brothers Holdings Inc.

$5.2 Billion Buyout

“There are multiple opportunities to make money in a leveraged transaction,” de Silva said, citing banks’ ability to charge fees for advising clients and arranging buyout debt. “Also, prices have bounced back and when you couple that with the spreads, it has a compelling business acumen,” he said.

TPG Inc. and CPP Investment Board, a unit of the Canada Pension Plan, agreed yesterday to purchase the Norwalk, Connecticut-based IMS Health in this year’s largest leveraged buyout, a transaction valued at $5.2 billion.

Goldman Sachs Group Inc. is arranging debt financing from its mezzanine and principal loan funds for the takeover of the world’s biggest provider of pharmaceutical and health-care market research, IMS said yesterday in a statement.

To contact the reporter on this story: Emre Peker in New York at epeker2@bloomberg.net.

Last Updated: November 6, 2009 14:21 EST