Investor demand for leveraged loans in Europe is making them take on risks that are more difficult to measure, according to Moody’s Investors Service.
Borrowers have raised loans that allow them to buy and sell businesses, add extra debt and change other financial terms governing credit pacts, according to a report from Moody’s. Companies are also getting more flexible terms on high-yield bonds, it said.
“While attention in the current highly borrower-friendly European leveraged market is mostly on reduced pricing, market conditions are also resulting in weaker documentation, which may be less visible,” Chetan Modi, Moody’s London-based head of European leveraged finance, wrote in the report. “Investors sometimes barely have enough time to get credit approvals, let alone analyze documentation risk.”
Demand for leveraged loans in Europe has surged as collateralized loan obligations raised several years ago run out of time to invest money they have available, Modi said in a telephone interview. “The market conditions reflect the current dynamics in the CLO market where existing CLOs are nearing the end of their reinvestment period and want to be fully invested before it ends.”
European companies have raised about $53 billion of leveraged loans so far this year compared with about $30 billion raised in the same period last year, according to data compiled by Bloomberg. The Standard & Poor’s European Leveraged Loan Index rose to 92.5, the highest since June 2011.
Elior SCA received lenders’ permission this month to leave its loans in place if it was sold, as well as to extend the debt, according to bond marketing materials. The French catering business owned by Charterhouse Capital Partners LLP raised an extra 453 million euros ($590 million) of term loan I debt this week after greater than expected demand from lenders, a person familiar with the deal said.