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Merkel Meeting Fails to Stem Steepest Loan Drop Since 2008

Leveraged loans in Europe are falling the most in nearly three years as investors doubt policy makers’ ability to thwart a double-dip recession.

The average bid price for actively traded European leveraged loans dropped 359 basis points to a 13-month low of 93.46 percent of face value last week, according to Standard & Poor’s Leveraged Commentary & Data. That’s the biggest weekly decline since the last week of October 2008 when prices lost 406 basis points, according to S&P LCD.

German Chancellor Angela Merkel and French President Nicolas Sarkozy are due to meet tomorrow in Paris as doubts about their ability to contain the sovereign crisis without eroding economic growth sent the cost of insuring European junk bonds to a 28-month high last week. Standard & Poor’s cut the U.S.’s top rating for the first time on Aug. 5, prompting speculation France is next in line for downgrade.

“It’s just the perfect storm the way all the bad news came at once,” said Stephen Faldo, head of Mizuho Corporate Bank Ltd.’s secondary loans desk in London. “It was the U.S. downgrade, poor economic data, the threat of a France downgrade, on top of everything else that has been going on in Greece, Spain and Portugal. We are not going to be able to get out of this anytime soon. We may end this year in negative returns.”

Leveraged loans in Europe, which have returned 2.45 percent so far this year, turned negative this month, losing investors 0.14 percent in the first two weeks of August, according to S&P.

Spie Increases Discount

To compensate for flagging demand French electrical engineering company Spie increased the discount on part of a 1.34 billion-euro ($1.9 billion) loan to fund its buyout led by Clayton Dubilier & Rice LLC. It offered investors the 585 million-euro seven-year B1 loan at a price of 97 percent of face value compared with 99 percent offered in July, according to data compiled by Bloomberg.

Blackstone Group LP plans to offer the 350 million-euro term loan B and the 70 million-euro second-lien loan used to fund the buyout of German outdoor clothing retailer Jack Wolfskin at between 98 and 98.5 percent of face value, Bloomberg data show.

The average discount private-equity firms are offering on leveraged buyout loans in Europe has increased, with the prices standing at 97.6 percent, compared with 99.2 percent of face value in the first half of the year, Bloomberg data show.

Investors demand an average 450 basis points more than benchmarks to lend to LBOs, up from an average 413 basis points over the first five months of the year, according to data compiled by Bloomberg. A basis point is 0.01 percentage point.

Fund Outflows

Floating-rate funds, which buy loans, suffered $1.7 billion of outflows in the past three weeks, with the $1.3 billion decline for the week ending Aug. 10 being the biggest since August 2007, according to data from Cambridge, Massachusetts-based EPFR Global.

Loan funds are also receiving less cash from redemptions. The pace of refinancing using high-yield notes to prepay loans has fallen as speculative-grade borrowers curtailed bond issuance 50 percent since July to $23.1 billion, according to Bloomberg data.

“The timing of the recent U.S. and European macro events could hardly have been worse from the perspective of the high yield market as liquidity tends to dry up in the month of August,” said Peter Aspbury, head of European credit research at JPMorgan Asset Management, which oversees $1.3 trillion.

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