JPMorgan Says `More Resilient' Leveraged Loans Offer Appeal: Q&A

(Bloomberg) -- Leveraged loans have become a more attractive option over high-yield bonds given their reduced call protection, the European Central Bank’s withdrawal of stimulus measures and an anticipation of rising rates, according to Todd Rothman, a managing director of high yield and leveraged loan capital markets at JPMorgan Securities Plc in London.

Rothman, whose bank currently holds the top spot for arranging leveraged loans in Europe, Middle East and Africa, spoke with Laura Benitez on Oct. 24. Comments have been edited and condensed.

Why have loans outstripped high-yield bond sales?

We’ve seen a meaningful pick up in M&A/leveraged buyout-related financing this year and a number of these transactions have been skewed more toward the loan market than high yield. On a number of transactions, such as Refinitiv and Akzo Nobel Specialty Chemicals, issuers have taken advantage of strong market conditions to increase senior leverage and shift debt from more expensive bonds to less expensive loans.

How will rising rates impact demand?

Strong CLO formation -- which is at post-crisis highs combined with an influx of managed account demand, particularly out of Asia -- has led to a substantial amount of investor cash being made available for floating rate product. The ECB’s withdrawal of stimulus measures and the anticipation of rising interest rates means floating-rate notes have continued to be attractive to both loan and bond investors.

Has appetite increased for second lien assets?

An increase in second lien demand has also aided loan market volumes this year. Pricing on second lien loans and unsecured LBO bonds has converged, making the loan market a more attractive option of late for some issuers, especially given the reduced call protection on loans. For those looking to put money to work in the loan market, the returns on second lien are going to be very attractive right now in a repricing environment.

Which market has an advantage in times of stress?

In times of volatility, the loan market is often more resilient to big moves in equities and general news flow and so we have yet to see some of the recent volatility in the bond market extend to loans. We expect the volatility theme to continue given the number of macro events out there and so continue to encourage issuers who need or want to tap the capital markets to be proactive about doing so.

What’s the outlook for M&A related debt sales?

We have been active in underwriting new deals in the fourth quarter, some of which will come to market later this year, and more so in the first quarter of next year. Levels of take-private and proprietary M&A dialogues with borrowers remain robust, while more general auction activity remains relatively muted. Similar to 2018, it feels like volumes next year will again be primarily a function of M&A volume.

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