Leveraged Finance Market Mired in Slump That Spans the Atlantic

  • Loan issuance heading for worst year since 2011 in both areas
  • Prices of U.S. leveraged loans close to 90 cents on the dollar

A slump in the leveraged finance markets is being felt from Wall Street to the City of London.

The high-yield loan markets in the U.S. and Europe combined are on track for their slowest year since 2011, with about $439 billion of debt issued in 2015, according to data compiled by Bloomberg. That’s a 37 percent plunge from this time last year.

Prices of high-yield corporate loans in the U.S. have dropped to about 90 cents on the dollar. The last time that happened was in 2011, when Europe policy makers in Brussels were combating a continent-wide sovereign debt crisis and their counterparts in Washington were struggling to raise the U.S. debt ceiling. Demand has been hurt by investors retreating from funds that buy the high-yield, high-risk debt.

Behind the slump are fewer deals by private-equity firms, which typically tap the market to fund buyouts and are being outbid by cash-rich companies. A surge in stock-market offerings is giving European companies an alternative method to pay down debt. A regulatory clampdown on excessive borrowing is also taking its toll, as is market turmoil from a global commodities slump. And there are few signs the pressures will abate anytime soon, with Moody’s Investors Service saying issuance will remain anemic next year.

“There is a lot angst in the high-yield market, and no one can see the end of this,” said Andrew Brenner, the head of international fixed income for National Alliance Capital Markets. “It’s going to get worse before it gets better, especially because year-end and quarter-end is when things usually widen out.”

The drop in loan prices in the U.S. is making it harder for banks to syndicate new deals.

“It’s absolutely impacting U.S. issuance,” said Phil Tseng, a managing partner at Tennenbaum Capital Partners in Los Angeles. “You’re seeing a number of banks who have taken on significant commitments and are having to revise terms to be more lender-friendly to distribute the paper.”

Last month, Fullbeauty Brands LP, an apparel retailer for plus-sized people, had to offer investors one of the biggest discounts of the year to complete its $1.2 billion loan deal financing its buyout by Apax Partners, Bloomberg data show. An $820 million first-lien portion of the loans was sold at 93 cents, while a $345 million second-lien slice was offered at 87 cents.

Veritas on Thursday reduced the size of a loan it’s seeking in the U.S. to help finance its buyout by Carlyle Group LP by $950 million to $1.5 billion while sweetening terms for investors, according to people with knowledge of the deal, who asked not to be identified citing lack of authorization to speak publicly. The interest rate being offered on the 760 million-euro loan backing the deal was also increased.

In the U.S., the $335 billion of loans that companies have raised from investors such as mutual funds is down 32 percent from the similar period of 2014, according to data compiled by Bloomberg.

Deteriorating credit quality in the energy, metals and mining industries will also hamper a revival in European sales, Moody’s analysts led by Mario Santangelo wrote in a report this month.

Declining LBOs

In Europe, the amount of acquisitions completed by private-equity firms has fallen 30 percent this year amid slow economic growth and a jump in regional stocks that has driven up potential targets’ prices. The resulting slowdown in new leveraged loans has added to the challenges facing managers of collateralized loan obligations, which are already struggling to find debt to repackage amid European Central Bank easing.

“Leveraged buyout volumes are down because the stock market was quite hot, with lots of IPOs,” said Julia He, a managing director at Napier Park Global Capital, which has $6.2 billion under management. “That means private-equity shops haven’t got lots of transactions.”

Buyout firms Advent International Corp. and Bain Capital took Worldpay Group Plc public in the largest London listing this year, raising 2.16 billion pounds ($3.3 billion). The private-equity firms rebuffed buyout offers for the U.K. payment processor.

Fewer CLOs

Issuance is likely to remain under pressure as the biggest buyers of loans in the U.S. continue to lose steam.

Barclays Plc is forecasting $70 billion to $80 billion of new CLOs next year as the market adjusts to looming regulation and rate increases by the Federal Reserve, down from a projection of as much as $110 billion for this year, according to a Nov. 6 report. Mutual funds and exchange-traded funds that purchase loans have seen $13.4 billion of net redemptions this year, according to Lipper.

In Europe, more IPO-funded loan prepayments may be coming as other private equity-owned companies are considering stock sales. Swedish manufacturer Dometic Group AB has said a listing is a possibility. Brakes Group, a Bain-controlled food services company, is also said to be work on a share sale.

“If these companies all refinance away from the loan market, then CLO managers might struggle to find the right assets,” said Aza Teeuwen, a London-based portfolio manager at TwentyFour Asset Management, which oversees 4.9 billion pounds, including CLOs.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE