U.S. junk-rated borrowers got $8.5 billion in loans last week as prices of the debt rallied to a 14 month high.
Navistar International Corp., the trucker facing an inquiry from regulators and call center operator West Corp, led 19 borrowers in selling debt to non-bank lenders such as collateralized loan obligations in the five days ended Aug. 16, the busiest since the week ending May 17, according to JPMorgan Chase & Co. The Standard & Poor’s/LSTA U.S. Leveraged Loan 100 Index rose Friday to 94.92 cents on the dollar, the highest since June 6, 2011.
Investor demand for high-yield, high-risk loans is climbing as economic reports about unemployment to consumer spending points that the global economy is stronger than expected. The cost of leveraged loans sold to non-bank lenders fell this month to 4.6 percentage points more than lending benchmarks, the lowest since March when margins averaged 4.54 percentage points, according to S&P’s Capital IQ Leveraged Commentary & Data.
“It’s a great time to be a borrower,” Timothy Broadbent, head of Americas leveraged-loan syndicate at Barclays Plc, said in an telephone interview. “Issuers are getting great rates” as companies take advantage of the cash flowing into the loan market.
DaVita Inc., a provider of kidney dialysis care, cut the rate on a $1.65 billion term loan that will finance its acquisition of Healthcare Partners to 3 percentage points more than the London interbank offered rate, from a range of 3.25 percentage points to 3.5 percentage points, according to data compiled by Bloomberg. Peter Grauer, the chairman of Bloomberg LP, the parent company of Bloomberg News, has served on DaVita’s board of directors since 1994.
Fairway Group Holdings Corp., the supermarket chain owned by Sterling Investment Partners, got a cheaper interest rate on a $260 million term loan it was seeking to refinance debt.
The company, whose flagship store is in Manhattan’s Upper West Side, lowered the interest it will pay to 6.75 percentage points more than the Libor, from 7 percentage points, according to Bloomberg data.
“The market is open,” Jonathan Insull, a money manager at Crescent Capital Group, which oversees about $10 billion of speculative-grade debt, said in a telephone interview. “It’s been a really busy August.”
Pinnacle Foods Finance LLC, the branded food products maker owned by Blackstone Group LP, increased the size of a term loan it was seeking to refinance debt by $150 million to $450 million. The credit, which was arranged by Barclays, will pay interest at 3.5 percentage points more than Libor, with a 1.25 percent floor on the benchmark rate, the data show.
There’s a “flurry” of activity as banks seek to push deals through before people leave on summer holiday, John Popp, who heads Credit Suisse Group AG’s $17.5 billion credit investment group in New York, said in a telephone interview. “The next couple weeks should be somewhat slow.”
Demand for loans has returned after a period in May and June when investors pulled back amid concern that Europe’s debt crisis was intensifying, according to Broadbent.
Sales in June fell to a six-month low of $11 billion as Greece prepared for a national election seen determining its future in the 17-nation euro currency zone. A total $20 billion was sold to non-bank lenders last month.
Employment increased by 163,000 last month, helped by a pickup at automakers and health-care providers, after a revised 64,000 June advance, Labor Department data showed. The median estimate of 89 economists surveyed by Bloomberg called for a rise of 100,000.
“Anxiety levels have dipped down,” said Insull. “Greece isn’t blowing up today.”
Fund managers this year had raised almost $20 billion of new CLOS by the end of July, or about 55 percent more than the $12.9 billion formed in all of 2011, according to a Wells Fargo & Co. report from July 27.
CLOs are a type of collateralized debt obligation that pool Leveraged-loans and slice them into securities of varying risk and return.
There’s also been a “steady” flow of retail money into funds that buy junk loans, said New York-based Broadbent.
Investors added $130.6 million to U.S. floating-rate funds in the week through Aug. 15 for a ninth straight week of inflows, according to research firm EPFR Global. The funds, which buy leveraged-loans, have received a net $2.2 billion this year.
Leveraged-loans, which finance buyouts, have a speculative-grade rating of less than Baa3 by Moody’s Investors Service and below BBB- by S&P.
A total $16.23 billion of loans to be sold to non-bank lenders was in or expected to come to market as of Aug. 15, according to S&P Capital IQ LCD.
JPMorgan, Barclays, Credit Suisse, Goldman Sachs Group Inc. and the U.S. securities unit of Royal Bank of Canada are arranging the financing for Carlyle Group LP’s $3.3 billion buyout of Getty Images Inc. from Hellman & Friedman LLC.
“There’s a pretty good sized calendar taking shape for post-Labor Day,” said Credit Suisse’s Popp.