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February 6, 2013 6:53 pm
Investors and bankers are urging private equity firms to launch a new leveraged buyout wave, to feed soaring demand for higher returns in the credit markets.
With money flowing into funds that buy leveraged loans of the kind used to fund LBOs, investors say they need “more Dells” to prevent a scarcity of loans.
The availability of financing from investors made it possible for Silver Lake Partners and Michael Dell to launch a $24.4bn bid for the computer manufacturer this week, with other debt-funded deals for UK companies Virgin Media and EE also announced or planned.
Loans are one of the few investments left that offer a premium return with relatively low risk, after years when interest rates have fallen and many bonds and credit derivatives offer only modest extra yields over US Treasuries.
Retail investors have poured money into mutual funds and exchange-traded funds that buy loans, while institutional investors have favoured a highly leveraged kind of investment vehicle called a collateralised loan obligation, or CLO.
The demand has raised loan prices, sending interest rates lower – a boon for private equity buyers wanting debt funding for buyouts, but limiting returns for investors.
The proportion of loans trading above face value surged from 53 per cent to 72 per cent in January, according to the Loan Syndications & Trading Association, an industry lobby group.
CLO managers, bankers and investors gathered at the annual American Securitisation Forum conference in Las Vegas last week complained at the higher prices and expressed concern that a dearth of issuance of underlying loans could bring the market revival to a halt.
“The loan market is in need of supply,” Adrian Marshall, managing director at fund manager BlackRock, said during a panel discussion. “For the last two or three years, the source of new supply has primarily been refinancing [existing loans]. Managers are certainly in need of collateral right now.”
CLOs raised $54bn in the US to invest in loans last year, and raised a further $8bn in January, according to Standard & Poor’s.
One banker who attended the event said supply constraints, not investor fears of overheating, were the main threat to the CLO market. “The biggest worry I have is that there are not enough quality assets to feed CLO demand. Spreads are just getting tighter and tighter on old loans, and it takes time to build a new LBO pipeline,” said the banker, who did not want to be named.
Bram Smith, executive director at the LSTA, said the Dell deal proved that the loan market was able to absorb big LBO deals of the kind that were common in the years before the credit bubble burst.
“There is a lot of pent-up demand, with the downside that this is pushing yields down and prices up. That is a signal to guys like Silver Lake that they can go ahead and do deals and do them in big size, and be comfortable that they can get them placed in the market.”
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