Eresearch Technology Inc. increased the size of a term loan and Chinese advertising company Focus Media Holding Ltd. received commitments for its borrowing as investors pour money into funds that buy floating-rate debt on concern that interest rates may rise.
Eresearch, a provider of health-care research services, boosted the size of its loan to $255 million, according to a person with knowledge of the transaction who asked not to be identified because the information is private. It plans to use the debt to refinance existing debt and fund a dividend. Eight banks have joined Focus Media’s $1.08 billion buyout loan with total pledges of $410 million in senior syndication, according to another person with knowledge of the matter. Carlyle Group LP and a group of investors agreed to purchase Focus Media on Dec. 19 for $3.7 billion in China’s biggest leveraged buyout.
Companies are tapping the loan market at the fastest pace in six years as funds investing in the debt have seen record inflows through February. The yield on leveraged loans has dropped 62 basis points in the last year to 5.93 percent JPMorgan Chase & Co. data show. A basis point is 0.01 percentage point.
Concern among investors that interest rates may rise is fueling a rotation into floating-rate senior loans from fixed-rate high yield bonds, Joerg Knaf, Natixis managing director, said in an interview. Seniors loans benefit from lower correlation to other asset classes and are higher up in the capital structure, making them more attractive, Knaf said.
Leveraged-loan issuance of $150.8 billion in the U.S. this year is the most on record since 2007 when $173.7 billion of borrowings were made in the same period, according to data compiled by Bloomberg. Collateralized loan obligations paying the lowest rate in five years are providing the fuel for the increase.
A new Federal Deposit Insurance Corp. rule may limit the the narrowing of CLO spreads in the top-rated portion of the securities as banks may be pushed to investing in the lower-rated slices of the fund, according to Morgan Stanley.
The regulation, set to take effect on April 1, requires CLOs, which buy and package speculative-grade credit into securities of varying risk and return, to be treated as “higher-risk” assets by banks with $10 billion of assets or more, Morgan Stanley said today in a report.
The price of leveraged loans climbed to 98.02 cents on the dollar on March 8, the most since July 2007, according to the Standard & Poor’s/LSTA U.S. Leveraged Loan 100 Index.