Lpc banks step up presence in europes leveraged loan market

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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."