Leveraged-loan issuance in the U.S. more than doubled this year, as private-equity firms sought funds for buyouts and borrowers refinanced debt amid a rebound from the worst financial crisis since the Great Depression.
More than $369 billion of loans were raised as of Dec. 28, led by financing for the purchases of Tomkins Plc and Burger King Holdings Inc., up from $170 billion in 2009, according to data compiled by Bloomberg. Interest rates fell to 3.91 percentage points more than the London interbank offered rate on average, from 10.28 percentage points at the end of 2009.
Cheap financing will bolster the loan market again in 2011, as buyout firms seek cash for acquisitions and borrowers refinance some of the more than $288 billion in bank debt due in the next four years, data from Barclays Capital and S&P LCD show. The return of collateralized loan obligations should also create demand as investors seek out higher returns while the Federal Reserve keeps interest rates near zero.
“You have this great set of fundamentals that are pushing people into bank debt and you have yield issues driving people into high yield, which has created a credit market that is absolutely phenomenal,” said John Eydenberg, global head of financial sponsors coverage at Deutsche Bank AG in New York, where he advises private equity firms. “The rocket fuel that powers financial sponsors is the credit markets.”
Leveraged-loan returns
The S&P/LSTA US Leveraged Loan 100 Index returned 9.35 percent this year as of Dec. 28, following last year’s 52.23 percent. In 2008 the index lost 28.2 percent. Gains for 2009 compare with 14.7 percent for junk bonds, based on the Bank of America Merrill Lynch U.S. High Yield Master II Index.
Leveraged loans and junk bonds are typically rated below BBB- by Standard & Poor’s and less than Baa3 at Moody’s Investors Service. Elsewhere in credit markets, Allstate Corp sued Bank of America Corp and its Countrywide mortgage unit over $700 million in residential mortgage-backed securities that the insurance company purchased. The cost of protecting U.S. corporate bonds from default was little changed, and Brightstar Corp., a distributor of wireless communication services, obtained a $500 million line of credit.