Understanding risk

Lpc banks step up presence in europes leveraged loan market

Nov 17 A growing number of banks are increasing their presence in Europe's leveraged loan market, competing with institutional investors for term loan B paper in a hunt for yield. Banks flushed with cash are seeing leveraged loans as a viable and attractive place to park money, with the number of banks and size of commitments both growing exponentially over the past year."It is fair to say that in 2015, typically bank participation in leveraged loans was around 5%-10%. Now it is around 25%," a senior banker said. Banks are no longer put-off by a lack of covenants and are happy to invest in covenant-lite term loans if it means taking big yields on big tickets. Banks are dedicating hundreds of millions to investing in Europe's leveraged loans, while some investment banks have invested up to 3bn in 2016. One banker said his institution had seen a 10% year-on-year increase in term loan B investment over the past three years."We use to invest from our funds but now we are putting the balance sheet to work in a big way," a second senior banker said. Well-capitalised European banks have stepped up their efforts in the space, which is also attracting Japanese, Indian and Chinese banks.

Frequent buyers include AIB, Bank of China, CIC, DZ bank, Erste Bank, Mediobanca, Mizuho, MUFG, Raiffeisen Bank and SMBC, according to three banking sources."They are all coming to the party, which is good news. It is quite surprising but encouraging. We want to create more supply as there is a much wider audience," the first banker said. SWEET SPOT

Double B credits have been a sweet spot for banks investing in the leveraged loan market. There has also typically been a preference for corporate leveraged borrowers such as John Malone's Liberty Global portfolio of assets, Patrick Drahi's Altice, Froneri -- the ice cream and frozen food joint venture between Nestle and Britain's R&R Ice Cream -- and global tea and coffee company Jacobs Douwe Egberts. The level of bank support for Froneri's 1.02bn leveraged loan financing in September surprised arrangers, with around 30% of the covenant-lite term loan going to banks. Their support enabled Froneri to price lower, even with a number of CLO investors falling away.

Banks are also getting more adventurous and are willing to invest in sponsor-backed leveraged loans as well as loans with a lower Single B rating. The move is altering the syndication strategies on new deals, in order to capture the growing buyer base. A 2bn leveraged loan financing to back Advent International's acquisition of French aerospace company Safran's biometrics and security business Morpho launched to early bird investors on November 15, mainly to enable banks interested in the deal to have enough time to do the work before commitments are due. It is due to launch for general syndication on November 28."The low Double B and high Single B loans are what a lot of banks are now investing in," the second senior banker said. The pattern of investing in term loan Bs is expected to increase as banks consult on Basel 4, which looks relatively favourably on leveraged loans compared to other asset classes such as project finance, according to a third banker. The move is aggravating the technical conditions dominating Europe's leveraged loan market, where demand has far outweighed supply. The loan market is now experiencing scalebacks not seen previously, akin to the kind seen in the high-yield bond market."The loan fund managers are actually struggling. In Europe there is a structural issue where there is not just enough supply of assets and the more mouths that appear, the tougher it gets for them," the first banker said."Scalebacks are fairly new in the loan world -- people would normally expect to see 25% scaleback and now you could certainly expect up to 40%. It is very significant and there is a lot of competition for assets."

Lpc european secondary loan market holds after trump victory

Nov 9 Europe's leveraged loan market rattled slightly on news of Trump's presidential victory with paper dipping in the secondary markets in early morning trading before bouncing back as investors held on to assets and demand continued to outweigh supply, banking sources said on Wednesday. Bids on Europe's secondary loan market softened by 50bp-100bp first thing on Wednesday morning but regained any losses by mid-morning. The offer side remained unchanged. The European loan market has been plagued by technicals, flushed with cash from CLO and credit fund issuance but limited by relatively low event-driven financings."Initially the market was nervy. Bonds were off and loans were bid lower, oil was lower and gold was higher. There was risk off, safe haven type moves. But it was a very short lived reaction. The loan market is back to form with demand outstripping supply and people chasing paper," a loan and bond investor said. A number of investors and traders were hoping to pick up some bargains on Wednesday morning but were faced with a lack of supply, as people held onto paper and were reluctant to sell.

There were similarities in the immediate aftermath of Britain's vote to leave the European Union in June, when the bid-offer spread widened as traders showed a willingness to buy into market weakness, but investors remained unwilling to sell."There was bargain hunting early doors but there were no bargains to be had. We were hoping there would be a lot of supply and dumping but that hasn't happened," the investor said.

A European syndicate head said: "Equities are down, crossover is flat. Loans are still well bid, bonds are down half a point but buyers are circling. Investors are hoping for a market puke to pick up names cheaper, but that is not happening yet. Time will tell."WAIT AND SEE

The European market is looking to the US market to see what direction that takes. While many bankers still plan to press ahead with primary loan launches, there could be some delay while the market digests the news. There could also be some changes in pricing and banks will be assessing underwriting risk for a swath of pipeline buyout deals. There may also be some delay to CLO issuance, but they are unlikely to be pulled, a European head of leveraged finance said."Europe will take its guidance from the US and at the moment it doesn't feel like it is going to fall out of bed. There will be a short period of uncertainty where people will wait to see. As a result you probably won't get a repricing launched this week as lenders will want some confidence that the market is there," a second European loan syndicate head said."Arrangers will not take an underwriting decision today or tomorrow but the European market will stay driven by technicals and that will remain unchanged."