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Economy Title: Loan Market Shrinks 13% as Bonds Beat Bank Debt in ‘Tug of War’ March 26 (Bloomberg) -- Record junk-bond sales sent leveraged-loan prices to an almost two-year high, causing the market to shrink by the most in its history as companies use their new issuance to repay bank debt. U.S. firms issued $58.3 billion of high-yield, high-risk bonds this year, more than a fourfold increase from the same period last year when sales totaled $11.3 billion, according to data compiled by Bloomberg. The S&P/LSTA US Leveraged Loan 100 Index rose 0.29 cent to 90.79 cents on the dollar as of yesterday, the highest since June 30, 2008. While bank lending to speculative-grade companies plummeted to its lowest point last year since the 2001 recession, companies are selling junk bonds at the lowest yields in 17 months. The leveraged-loan market declined to $517.3 billion this year from a peak of $594.7 billion also 17 months ago, leading investors to bid up prices of existing debt. “We have gone from December 2008, when there were no buyers of loans, to March 2010, when there are no sellers,” said Randy Schwimmer, head of capital markets at Churchill] Financial LLC in New York. Lear Corp., the maker of automotive seats that exited bankruptcy in November, sold $700 million of debt in a two-part offering of 8.125 percent and 7.875 percent notes this week to repay a portion of its bank borrowings. The Southfield, Michigan-based company joined more than 72 issuers that refinanced loans with bonds this year, after 211 borrowers did so in 2009, according to Barclays Plc. Leveraged Loan Index The S&P/LSTA Leveraged Loan Index, representing about 95 percent of the institutional U.S. bank debt market, contracted by 13 percent by the end of February from its peak in November 2008, according to CreditSights Inc. High-yield, high-risk debt is graded below Baa3 by Moody’s Investors Service and BBB- by Standard & Poor’s. Junk-rated companies borrowed $20.1 billion in loans this year and 31 companies are currently seeking $11.8 billion of bank debt, according to JPMorgan Chase & Co. Banks sold $38 billion of leveraged loans in 2009, New York-based analysts led by Peter Acciavatti wrote in a March 19 report. Loan repayments accounted for $16.9 billion, or 28 percent, of $59.6 billion of bond sales this year, the analysts said. Borrowers used 25 percent of the record $180 billion total issuance to take out bank debt in 2009, according to the report. The cost of financing debt has declined in both the bond and loan markets following the Federal Reserve’s efforts to re- start lending. Bernanke Testimony Fed Chairman Ben S. Bernanke told the House Financial Services Committee yesterday that the U.S. economy still needs low interest rates and the central bank will tighten credit “at the appropriate time.” Fed officials are developing tools to raise interest rates and prevent banks from stoking inflation through excessive lending in a recovery. The bank’s fed funds rate target range for overnight bank lending is 0 percent to 0.25 percent. Initial jobless claims fell 14,000 in the week ended March 20 to 442,000, the lowest level in six weeks and in range with first-time jobless applications before the Lehman Brothers Holdings Inc. bankruptcy in September 2008, according to U.S. Labor Department figures. Employers are slowing the pace of payroll reductions amid a pickup in manufacturing and expansion overseas. “If the Fed is still forced to adhere to a zero interest- rate policy later this year, that would imply that there will be important segments of the U.S. economy that continue to disappoint, which may limit the degree of spread narrowing,” said John Lonski, chief economist at Moody’s Capital Markets Group. Loan Spreads The average spread to maturity over the three-month London interbank offered rate for the most actively traded leveraged loans fell to 3.81 percentage points yesterday, from an all-time high of 11.12 percentage points in December 2008, according to S&P’s Leveraged Commentary and Data. Libor, the rate banks charge to lend each other, hasn’t risen above 0.3 percent since last September, Bloomberg data shows. This year’s credit agreements include an average floor of 2.14 percent on the lending benchmark, according to Bloomberg data, to protect investors from the record low levels. Yields on junk-rated bonds dropped from a December 2008 record of 22.65 percent to 8.6 percent yesterday, the lowest since Oct. 17, 2007, according to Bank of America Merrill Lynch’s U.S. High Yield Master II index. “There’s a tug of war between the bond market and the loan market,” said Mark Okada, co-founder and chief investment officer of Highland Capital Management LP in Dallas with $20 billion in loan investments. “With both markets being open, treasurers can choose between lower floating rates in the bank- debt market versus higher fixed rates in the bond market.” Lyondell Transaction Lyondell Chemical Co., the closely held chemical company that filed for bankruptcy in January 2009, this week cut the size of a term loan it seeks by half to $500 million and increased the size of its bond offering by $500 million to $2.75 billion to finance its Chapter 11 exit. The Houston-based company’s 375 million euro ($502 million) and $2.25 billion notes due 2017 have 8 percent coupons. Its term loan has a proposed interest rate 4 percentage points more than Libor, with a 1.5 percent minimum for the lending benchmark. Lyondell reduced the margin by 0.25 percentage point and cut the Libor floor by 0.5 percentage point since its initial proposal. Lenders will fund the loan at 99 cents on the dollar, reducing proceeds for Lyondell and boosting the yield for investors. The debt would yield about 5.7 percent to maturity. David Harpole, a spokesman for Lyondell, declined to comment about specifics of the company’s financing activities. Proceeds will be used to repay existing debt, according to a March 11 statement. The company owed $12.8 billion when sought bankruptcy protection, according to an S&P report. Loans made up $12.5 billion of its borrowings.
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