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Asset managers broaden leveraged finance funds' reach
September 13, 2012 / 10:36 AM / 5 years ago

Asset managers broaden leveraged finance funds' reach

LONDON (IFR) - The integration between the European and U.S. leveraged loan markets, and the convergence of leveraged finance and high-yield capital markets were further reinforced this week following the announcement of more fund-raising by two major investment firms.

Babson Capital said it had raised over $1.2 billion (745 million pounds) for its Global Loan Fund in just 18 months, while Intermediate Capital Group announced a new institutional combined loan and high-yield bond investment strategy in response to demand from pension funds and other institutional investors.

Other fund managers have also recently launched new funds that incorporate both loans and bonds in order to help better manage volatile flows in high-yield and leveraged loan markets.

The strategy allows investors to benefit from the ability to invest in both asset classes depending on which has the best risk-adjusted returns at a given point in time, ICG said.

Fund managers also aim to take advantage of a gaping hole in demand for leveraged loans left by the demise of collateralised loan obligations, which are nearing the end of their reinvestment periods at an accelerated pace.

Although the creation of new CLOs has picked up in the U.S., bankers are doubtful that Europe can mirror that due to structural and valuation anomalies.

Leading leveraged finance banking teams have also adopted a global approach to capital markets in the past year due to heightened volatility in Europe compared to the deeper, more liquid, U.S. market.

That has led to a substantial amount of dollar fundraising, in both loans and high-yield bonds, by European companies. Just this week, Germany tyre company Continental priced an upsized $950 million seven-year senior secured bond with a coupon of just 4.5 percent.

Other companies, such as Spanish cable ONO, have also sought funding in the U.S., while French cable business Numericable is considering whether to tap the dollar or euro high-yield market, bankers said.

Babson Capital, which is seeking to take advantage of elevated loan spreads in both Europe and the US, claimed that the speed in which its Dublin-domiciled fund was raised illustrates the advantages of a global approach.

Babson Capital’s total assets under management in global high-yield investments are approximately $27 billion, and the Global Loan Fund takes total AUM of the open-ended high-yield credit funds managed by Babson to over USD3bn, the firm said in a statement on Thursday.

EBBS AND FLOWS

Further evidence that the leading players in credit are taking an increasingly integrated approach to leveraged finance and high-yield capital markets was provided last week by ECM Asset Management.

The firm, owned by Wells Fargo, announced a new senior secured fund, which will invest in both loans and bonds to take advantage of what it expects to remain very attractive yields in Europe.

The fund will target returns of 6-8 percent and has a target size of 500 million euros (400 million pounds).

“One aim is to broaden out as much as possible the assets that we can buy, which will enable us to take advantage of the seasonal flows in both high-yield and loans,” said Matthew Craston, head of alternative investments at ECM.

Market participants expect the flow of primary loan deals to ebb in the near term - following a number of pulled leveraged buyout deals including Schenck and Iglo - leaving high-yield the busiest place for new issues for this month at least.

Leveraged finance bankers said that LBO auction activity remains relatively low, with the financing of any deals in the works unlikely to hit markets until the later this year or early 2013 due to lengthy, and volatile, sales processes.

This is the first time that ECM, which has $9 billion in assets under management, has managed the two asset classes together in a single fund. ECM will still operate separate standalone loan and high-yield funds, the latter of which was only launched last year.

A fund manager that runs a bond-only portfolio said he had also been approached by investors about the possibility of including loans in the portfolio, and said it was an increasing topic of debate in the market where allocations are squeezed and high-yield supply can be sporadic.

The best opportunities are likely to be in the primary market, ECM said, as bank demand for loans remains capped by regulatory restraints on capital.

Reporting by Natalie Harrison, IFR Markets; Editing by Alex Chambers

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