Western European companies are increasing their borrowing of leveraged loans, with issuance this year exceeding the amount raised in all of 2012.
Borrowers from Jaguar Land Rover Ltd., a unit of India’s Tata Motors Ltd., to German publisher Springer Science & Business Media GmbH obtained $131 billion in financing in 2013, more than the $92 billion raised last year, according to data compiled by Bloomberg.
“Demand for European leveraged loans has been driven by the new wave of CLOs in Europe, banks’ capacity to lend and U.S. loan managers who can allocate up to 20 percent of their portfolio in Europe where they get better value,” Stuart Fuller, a London-based loan portfolio manager at ECM Asset Management Ltd., said in a telephone interview.
Prices of the senior-ranking debt have risen about 2 percent this year, according to Standard & Poor’s European Leveraged Loan index. Money managers have raised more than 4.5 billion euros ($6 billion) of collateralized loan obligations in the region this year, the highest since the peak of $46.6 billion in 2007, Bloomberg data show.
Jaguar Land Rover obtained 1.25 billion pounds ($1.96 billion) of loans last month to replace existing debt, according to data compiled by Bloomberg. The Tata Motors-owned company, which is rated below investment grade, got the three- and five-year loans from a pool of 22 banks, according to a company statement. Springer Science raised about $2.6 billion in loans backing BC Partners’ buyout of the German academic publisher, Bloomberg data show.
“There is a significant amount of cash coming from pension funds and insurers into managed accounts,” said Phil Yeates, head of debt fund management at Rothschild in London. “They had a good run with bonds but are moving away from the asset class into loans.”
Lender appetite for the high-risk debt has allowed companies to refinance borrowings and pay dividends to shareholders, many of which are private-equity firms.
Wood Mackenzie Ltd., an energy advisory company, last week borrowed 135 million pounds to help pay a dividend to owner Hellman & Friedman LLC, Bloomberg data show. The loan was issued at a price of 99.75 and began trading at more than 100 percent of face value, according to data provided by Markit.
“The market is two-tiered: a credit in the top tier can get away with a lot but credits below that will be subject to lenders’ push-back on price,” Yeates said.
Leveraged loans raised this year by European companies pay an interest margin of about 4.4 percent more than benchmark rates, according to data compiled by Bloomberg.