ADVERTISEMENT

Companies Look Beyond Bank Funding Into Leveraged Loan Market

Companies Look Beyond Bank Funding Into Leveraged Loan Market

(Bloomberg) -- As banks across Europe work to clean up their balance sheets, some of the companies they traditionally financed are finding other ways to raise capital including going to leveraged loan investors.

Companies such as Nordic security systems provider Sector Alarm AB and Spanish telecommunications firm Masmovil Ibercom SA launched leveraged loans last month. At least 1 billion-euros ($1.12 billion) of additional debt is expected to launch ahead of the summer break from Spanish publisher Promotora de Informaciones SA, known as Prisa. The company is planning a combined loan and bond issue that will further expand the corporate footprint.

They are among a batch of borrowers moving into the market that might previously have relied on local banks to provide financing, according to industry bankers.

"The number of corporate borrowers in the leveraged loan market is growing, slowly but surely, as they diversify away from traditional bank lending relationships and look to other viable funding sources," said Kevin Foley, head of leveraged finance capital markets for EMEA, JPMorgan Chase & Co.

Speculative grade corporate borrowers are common in the U.S. but rare in Europe, which is usually dominated by private equity owned companies. Yet, at 4.8 billion euros ($5.39 billion), the volume of non-sponsored paper launched in May makes it the biggest month in at least four years.

Companies Look Beyond Bank Funding Into Leveraged Loan Market

With troubled banks across the continent working to reduce their balance sheet risk, more of their clients could swell the ranks of companies issuing in Europe’s leveraged loan market and could boost new-issue volumes that are currently 35% down on last year.

"They’re becoming increasingly sophisticated in their approach to financing and we expect the volumes of corporate borrowers in this market to continue to grow,” Foley said.

High Demand

For companies turning to leveraged loans, one of the benefits is the attraction of raising long-term debt without the constraints of maintenance covenants.

These borrowers are often rated in the double-B category or have strong single-B ratings, and as such are in high demand. Investors that have loaded up on riskier buyout loans are looking for better rated credits to balance their portfolios. Some loan funds have the firepower to put up big ticket orders, including those investing for large Japanese firms that lean toward stronger ratings.

This appetite can lead to tight pricing for favored issuers. Sector Alarm this week tightened its margin to 350 basis points over Euribor, while Berry Global printed at a margin of just 250 basis points. Across all European leveraged loans priced in the three months to end-May, the average margin was 395 basis points.

That’s not to say that all investors prefer leveraged corporates over borrowers owned by private equity. Sponsors can be aggressive, but they are repeat-issuers via their various portfolio companies and investors are to some degree familiar with how they are likely to behave if a company runs into trouble.

To contact the reporters on this story: Ruth McGavin in London at rmcgavin1@bloomberg.net;Laura Benitez in London at lbenitez1@bloomberg.net

To contact the editors responsible for this story: Sarah Husband at shusband@bloomberg.net, Vivianne Rodrigues

©2019 Bloomberg L.P.