Leveraged Loan Issuance Doubles This Year
Ever wonder where those hedge funds and private equity funds get the billions to take over and delist a big operation like Burger King Holdings? The banks: the big global investment banks like Deutsche Bank (DB), Morgan Stanley (MS), and Goldman Sachs (GS).
More than $369 billion of loans were raised as of Dec 28 vs. $170 billion in 2009. And now, the time has never been better recently with rates to borrow falling to an average of 3.91% vs. 10.28% at the close of ’09.
Economists see the ‘Cheap Financing’ as an indicator that 2011 will produce even more activity. This may spur a rise in collateralized loan obligations while the Fed keeps interest rates near zero.
New CLOs, a type of collateralized debt obligation that pool high-yield, high-risk loans and slice them into securities of varying risk and return, increased this year. More than $3.4 billion were issued in the U.S. more than doubling ‘09’s $1.22 billion volume though still below the ‘07 peak of $91.1 billion.
The S&P actually has a Leveraged Loan 100 Index which returned 9.35% this year. In ’08 the Index lost 28%. Ah… the return of the credit markets. As the global default rate has dropped to 3.3% in Nov ’10 from 13.55% in Nov ’09 investors and borrowers have flooded into the market and ‘inflows’ have soared.
That makes more and more money available for M&A specialists. More than $14 billion flowed into leveraged-loan funds in 2010.
But it’s not only opening up for funds and equity groups, mall owner Simon Property (SPG) is set to borrow $4.6 billion from a group of underwriters including Citi, DB, GS, and MS to buy Capital Shopping (CSCG on the London Exchange). Bank of America (BAC) remains the top arranger of leveraged loans, increasing its share to 19% as of Dec 28 from 16.5% in ’09.
CLO spreads on the highest-rated portion of debt was 215 basis points higher than Libor as of Dec 16 after widening to as much as 725 basis points in April of ‘09. Spreads were as narrow as 23 basis points in ‘07, according to Morgan Stanley data. As the spreads widen in 2011, as I believe it will, investors and pension funds will return to capitalize on the loans. Morgan Stanley predicts issuance of $15 billion to $20 billion in CLO’s in ‘11.