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Loan Sales Beat Junk Bonds as Banks Back Buyouts Amid EU Crisis

Investors bought more than twice as much of leveraged loans than junk bonds in the first half of May as companies tapped banks for buyouts.

Banks arranged $10.2 billion of high-yield, high-risk loans this month, compared with $4.46 billion of notes, according to data compiled by Bloomberg. Interactive Data Corp. is seeking a $1.3 billion term loan to back its acquisition in what would be the biggest LBO financing commitment since July 2008.

Speculative-grade companies are turning to the loan market to take advantage of lower financing costs after the European debt crisis pushed up borrowing rates for junk bonds. The flow of cash into the bank debt market is supporting a rally in loan issuance, enabling banks to line up as much as $10 billion for a Blackstone Group LP-led takeover of Fidelity National Information Services Inc. that would be the biggest since the credit markets crumbled in 2007.

“Banks are a lot more involved than they were six to nine months ago, and not just in better terms but also in terms of the size they’re willing to extend,” said Michael Anderson, a New York-based credit strategist at Barclays Capital, the investment banking division of Barclays Plc.

“Large LBOs are going to contribute to issuance and certainly pose upside risk to our forecast,” which the bank has at as much as $80 billion for this year, Anderson said.

High-yield, high-risk debt is rated below Baa3 by Moody’s Investors Service and BBB- by Standard & Poor’s.

Junk-Bond Costs

The cost of borrowing in the junk bond market jumped from its lowest level in two-and-a-half years by as much as 1.05 percentage point to 6.47 percentage points more than similar-maturity Treasuries, according to Bank of America Merrill Lynch’s US High Yield Master II Index. It has since tightened to 6.14 percentage points.

At least three companies canceled planned note sales last week as issuance dropped to its lowest weekly volume for the year, Bloomberg data show. In the leveraged-loan market, 10 transactions valued at $7.2 billion were completed, the most this year, JPMorgan Chase & Co. analysts led by Peter Acciavatti in New York said in a May 7 report.

The average spread to maturity over the three-month London interbank offered rate for the most actively traded leveraged loans climbed as much as 0.81 percentage point to 4.25 percentage points from an almost two-year low, according to S&P’s Leveraged Commentary and Data. It dropped to 4.03 percentage points yesterday.

Greek Crisis

Three-month Libor, the rate banks charge to lend to each other, climbed to 44.51 basis points, or 0.4451 percent, since last week. The lending benchmark shot up by a record 15 percent to 42.81 basis points on May 7 as European leaders sought to prevent the debt crisis in Greece from spreading.

European policy makers this week unveiled an unprecedented loan package worth almost $1 trillion and a program of bond purchases to halt a sovereign-debt crisis that threatened to shatter confidence in the euro. The aid package isn’t a cure-all, Federal Reserve Chairman Ben S. Bernanke told U.S. lawmakers at a closed-door briefing.

Fed officials will consider whether to change their pledge for an “extended period” of low interest rates next month after the economy added 290,000 jobs in April, the most in four years. The federal funds rate for overnight loans among banks has been at a record low range of zero to 0.25 percent since December 2008.

Loans Gain

Investors took out $44 million this week from bank loan mutual funds, breaking a 23-week streak of inflows and reducing this year’s allocation to $4.37 billion, according to data compiled from Deutsche Bank AG reports, citing Lipper FMI. Junk-bond mutual funds had a $1.69 billion outflow, the biggest in 2010, cutting year-to-date contributions to $2.19 billion.

“You have the first serious outflow from high-yield bond funds reacting to interest rate fears, systematic fears and investors wanting to have lower risk; you don’t have that in loans,” said Mark Okada, co-founder and chief investment officer of Highland Capital Management LP in Dallas with $20 billion in loan investments.

Loans returned 5.15 percent this year, according to S&P LCD. That compares with a 5.62 percent gain in the Bank of America Merrill Lynch US High Yield Master II index.

“We continue to think that this year loans might have more room to run because there’s likely to be more bond issuance to take out bank debt,” said Annie Chu, a credit strategist at Goldman Sachs Group Inc. in New York.

$15 Billion LBO

Companies used $26 billion from note sales this year, or 23 percent of issuance, to repay bank debt, JPMorgan analysts said in their report. As of May 7, banks were preparing to sell eight dollar-denominated bond issues for $2.8 billion, and two notes for 665 million euros ($831 million) in the U.S., compared with 37 institutional loans for $11.7 billion, they said.

Bank of America Corp., Barclays, Citigroup Inc., Credit Suisse Group AG, Deutsche Bank and JPMorgan are said to be among the banks that have been working on financing for Fidelity National’s $15 billion takeover by Blackstone, Thomas H. Lee Partners LP and TPG.

Silver Lake and Warburg Pincus LLC’s buyout of Interactive Data is likely to use a $700 million bridge facility and a $150 million revolving line of credit in addition to the proposed term loan.

“Activity is picking up across leveraged finance and that would certainly mean that loans are going to be more active in new issue,” Highland’s Okada said. “We haven’t had many sizable loan deals, the market could definitely handle some larger acquisitions.”

Emre Peker in New York at +1-212-617-8742 or

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