European companies owned by private-equity firms are raising a record amount of leveraged loans in dollars to take advantage of lower rates offered by U.S. lenders competing for deals.
Springer Science & Business Media GmbH, a German academic publisher, and child car-seat maker Britax Childcare Ltd. were among companies borrowing a total $14.5 billion this year, almost triple the $5.2 billion raised over the same period of 2012, according to data compiled by Bloomberg. That’s equivalent to 32 percent of the volume raised in euros, up from 23 percent last year, the data show.
Companies are taking advantage of soaring demand for riskier assets as the Federal Reserve holds down borrowing costs to fuel the U.S. economic recovery. The average interest margin on first-lien leveraged loans in dollars ranges from 350 basis points to 400 basis points more than benchmark lending rates compared with a spread of 425 basis points to 475 basis points for loans in euros, according to Marlborough Partners, a London-based debt advisory firm. A basis point is 0.01 percentage point.
“We are seeing more European companies tapping the U.S. market where they can get better pricing and covenant flexibility than in Europe,” said John Foy, the head of leveraged finance at Prudential Plc’s M&G Investments, which manages more than 234 billion pounds ($378 billion). “U.S. loan funds are having record inflows this year as investors look for yield. It’s just too much money chasing too few deals.”
Investors poured more than $55 billion into funds that buy leveraged loans this year, representing a 74 percent increase in assets under management from 2012, according to an Oct. 10 report from Bank of America Corp. The average margin for first-lien leveraged loans in dollars fell to 400 basis points from 449 basis points over the same period, Bloomberg data show.
European companies borrowing from the U.S. market this year raised leveraged loans equivalent to 5.2 times earnings before interest, tax, depreciation and amortization, compared with 4.7 times for deals in euros, according to Marlborough Partners.
Britax, owned by buyout firm Nordic Capital, raised a $280 million covenant-light term loan B earlier this month that offered an interest margin of 350 basis points more than Libor, according to data compiled by Bloomberg. That compares with an initial spread of 500 basis points more than the euro interbank offered rate the Chertsey, England-based company paid on a 162 million-euro ($222 million) facility agreed in 2010, Bloomberg data show.
Covenant-light loans and bonds typically give companies more financial leeway as they don’t contain financial-maintenance provisions requiring the borrower to meet restrictions such as the level of debt relative to earnings before interest, tax, depreciation and amortization.
“The U.S. financing market is attracting many issuers and tempting many more,” said David Parker, a London-based managing partner at Marlborough Partners. “That’s putting pressure on European lenders to entertain lower pricing and more covenant-loose transactions, much to the delight of European borrowers.”
To contact the reporter on this story: Patricia Kuo in London at email@example.com