Leveraged Loans Rebuffed by U.S. Embraced in Yield-Hungry Europe

  • Borrowers make `opportunistic attempt' to get better rates
  • Keurig Green Mountain expands euro loan by almost four fold

Borrowers that are getting the cold shoulder in the U.S. to fund highly leveraged corporate takeovers are being welcomed in Europe, where central bankers are keeping the money spigots open wide.

Keurig Green Mountain Inc., a coffee brewer being acquired by a JAB Holding Co.-led investor group, boosted the euro portion of a loan financing almost four fold to 900 million euros ($1.01 billion). The company had faced tepid demand in the U.S., people with knowledge of the matter said. U.S. companies have borrowed about $1.28 billion in Europe so far this year, putting them on track to exceed the $9.4 billion they borrowed for all of last year, according to data compiled by Bloomberg.

Borrowing costs in Europe are being kept in check as the European Central Bank pledges to expand monetary stimulus at the same time as the U.S. Federal Reserve’s decision to boosts interest rates for the first time in more than a decade reduces appetite for risky assets.

“If there was enough demand for these deals in the U.S., they wouldn’t price in Europe at all,” said Anthony Robertson, head of global leveraged finance at BlueBay Asset Management in London. “They are making an opportunistic attempt to capture the tighter European pricing.”

Syndication Challenge

Apollo Global Management LLC co-founder Josh Harris said on Jan. 29 financing markets for buyouts were shut in the U.S., which is making the job of syndicating more than $95 billion of funding banks have agreed to provide to finance buyouts and mergers tougher. That’s sending companies like Keurig into the arms of lenders in Europe, where loans gained more than 5.5 percent last year, compared with a 2.75 percent loss for the debt in the U.S.

Solera Holdings Inc., a seller of risk-management software for investors, plans to sell parts of a $1.9 billion loan backing its buyout by Vista Equity Partners to investors in Europe, according to people with knowledge of the matter. The company will also sell portions of a $2.03 billion junk bond offering to buyers in the region.

The carnage in commodities and concerns about a slowdown in China has lowered appetite for the debt of risky companies in the U.S. Investors pulled $405 million from loan mutual funds last week, the 28th straight week of outflows, according to data provider Lipper.

As a result leveraged loan prices have plunged to levels last seen in 2009, outpacing the decline for similar debt in Europe.

In Europe “the buyer base on the loan side is very different from the U.S.,” said Jon DeSimone, a managing director at Sankaty Advisors LLC. “It’s much more stable and the banks participate in buying new loan deals.”

Default Gap

Fitch Ratings said defaults in European leveraged loans will remain low this year, with only about 2 percent of the debt expected to default in 2016 because of limited exposure to commodity and energy producers. The ratings company forecast that the same measure for the U.S. companies will rise to 2.5 percent by December.

U.S. borrowers are taking advantage of this sentiment, with Keurig on Friday boostingthe size of the euro portion of a $2.95 billion loan to as much as 900 million euros from 250 million euros. The loan is part of a $6.4 billion financing funding Keurig’s $13.9 billion acquisition by the JAB-led investor group. JAB is a closely held investment firm based in Luxembourg that manages the $16 billion fortune of Austria’s Reimann family.

“If you are an European investor, the universe of deals is more limited than the U.S.,” Sankaty’s DeSimone said. “You generally see the market receptive to new names even if they are a bit of a challenge in the U.S.”

U.S. borrowers are likely to increase their reliance on the European loan market, taking advantage of signals from the ECB of more support while the Fed raises interest rates, according to Stuart Perry, of BNP Paribas SA’s loan syndicate desk.

“With the ECB expected to continue to buy bonds, we would expect investors to continue to look to high yield for return,” said Perry. “This all means that the European loan market should continue to diverge from U.S. loan market.”

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