EXTRA CREDIT: Banks Are Reopening The Tap On Leveraged Loans
10 November 2009 - 7:27AM
Dow Jones News
Barclays Capital, Deutsche Bank and RBC Capital Markets will
stump up $1.65 billion in financing for the leveraged buyout of
Northrop Grumman Corp.'s (NOC) TASC consulting unit by General
Atlantic LLC and Kohlberg Kravis Roberts & Co.
The deal is the latest merger financing in the leveraged loan
market, which has been reborn as banks' appetite for risk
grows--especially when willing investors quickly take the debt off
the banks' hands.
"Success is a great confidence booster," said Steven Miller,
managing director of the Standard & Poor's Leveraged Commentary
and Data unit.
Renewed interest in making new leveraged loans--those made to
companies with below-investment-grade credit ratings--has been
driven by a stunning rally in the price of existing debt. The
Barclays Capital Loan Index, for example, has generated positive
returns in every month of 2009 and is up a record 48.9% for the
year. The success has lured borrowers and investors back to the
table, and banks are eager to meet the renewed demand.
The market had been dormant for two years after the
subprime-mortgage market cratered and investors shied away from
risky assets, such as leveraged loans and high-yield bonds. That
retreat left investment banks like Deutsche Bank saddled with of
billionsdollars of loans to sub-investment-grade-rated
companies.
As a result, sales of new leveraged loans plunged to $153
billion last year from $535 billion in 2007 and $480 billion in
2006, according to data from Standard & Poor's LCD unit. Sales
of new leveraged loans slowed even further this year--the total so
far is roughly $30 billion--but analysts expect to see them
increase again in 2010.
To be sure, much of the activity in the market for this type of
debt this year has come from debtor-in-possession financing for
companies reorganizing under bankruptcy protection or from
companies increasing the size of their existing facilities. Those
are hardly bullish signs.
But confidence is the economic recovery is rising, leading to an
uptick in mergers and acquisitions, and in leveraged buyouts. If
this continues, analysts at Barclays Capital led by Bradley Rogoff
estimate that sales of new leveraged loans are likely to top $32
billion next year.
Banks are increasingly eager to lend to sub-investment-grade
companies, as long as they can find fund managers willing to take
the debt off their hands.
"You shouldn't confuse lending and syndication," said Mark Pibl,
managing director of high-yield and leveraged loans at NewOak
Capital in New York. "Investors are increasingly willing to buy
these deals, though banks still don't want to hold this risk on
their balance sheets for too long."
Barclays Capital's forward calendar stands at $4.1 billion. That
excludes the $1.65 billion backing the takeover of Northrop
Grumman's TASC consulting unit, but includes $625 million of loans
for RehabCare Group Inc.'s (RHB) acquisition of Triumph Healthcare
LLC and $2.85 billion for Denbury Resources Inc.'s (DNR) purchase
of Encore Acquisition Co. (EAC).
It also includes $3 billion in loans for TPG Inc.'s and CPP
Investment Board's $5.2 billion takeover of IMS Health Inc. (RX),
the biggest buyout so far this year.
For investors, like Pibl, scooping up leveraged loan deals is a
no-brainer. "They are better structured than in the heyday, and
returns are in the high teens," he said.
Even so, banks may be comfortable about investor demand, but
they are still likely to take a prudent approach to lending for the
time being.
"There is a very low risk type of credit emerging in the market
place right now. Although it (the leveraged loan market) is showing
signs of life, it's clearly credit specific," said a leading
leveraged loan banker at a major investment bank, who wished to
remain anonymous.
"We are still in a non-growth recovery and there is no job
creation, so we'll see transactions where it makes sense," the
banker said.
(Kate Haywood writes about high-yield and distressed debt for
Dow Jones Newswires. She can be reached at 212-416-2218 or by email
at kate.haywood@dowjones.com)
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