BlackRock Joins Blackstone in Loan Fund Frenzy: Credit Markets

Date: Thursday, April 29, 2010
Author: Bloomberg

BlackRock Inc., the world’s largest asset manager, and Blackstone Group LP’s GSO Capital Partners LP are forming mutual funds to invest in loans as the London interbank offered rate rises to the highest level since August.

The firms have joined Goldman Sachs Group Inc. in announcing funds investing in leveraged loans pegged to short- term interest rates. Investors poured more than $2.5 billion into bank-loan mutual funds in March and the first three weeks of April, more than triple the amount for March and April last year, according to Lipper FMI data.

The Federal Reserve will likely raise its target rate for overnight loans between banks to 0.75 percent by the end of this year, up from 0.25 percent, according to the median estimate of 67 analysts surveyed by Bloomberg. The S&P/LSTA U.S. Leveraged Loan 100 Index has returned 5.68 percent this year, building on last year’s record 52 percent as lending continues to open up.

New money “will provide financing, which will help” mergers and acquisitions, said Tom Ewald, a New York-based money manager who runs the Invesco Floating Rate Fund at Invesco Ltd., which has about $11 billion of leveraged loans under management. “That is a positive for all markets and the economy.”

Leveraged loans total $91.6 billion this year, more than four times the amount underwritten in the same period of 2009, according to data compiled by Bloomberg. The interest charge on leveraged loans is typically tied to Libor and as rates rise, the overall coupon increases. Three-month Libor rose to 0.344 percent today, the highest since Aug. 28, and up from a low of 0.249 percent on Feb. 4, according to Bloomberg data.

‘Natural Hedges’

“This is one asset class that should perform well when short-term rates start to rise,” said Jeff Bakalar, co-head of the senior loan group at ING Investment Management. “It is one of a few natural hedges available to retail investors.”

Elsewhere in credit markets, the extra yield investors demand to own company debt instead of Treasuries rose 2 basis points to 149 basis points, or 1.49 percentage points, down from 176 at the end of 2009, Bank of America Merrill Lynch’s Global Broad Market Corporate Index shows. Average yields rose 5.4 basis points to 3.95 percent.

Ratings downgrades in Spain, Greece and Portugal led companies to pull European bond sales, while the Czech government said it was delaying its planned issue of euro- denominated notes.

“We are waiting for better conditions,” Deputy Finance Minister Ivan Fuksa said in an interview in Prague yesterday.

Casino Guichard-Perrachon SA, the biggest supermarket owner in Paris, withdrew initial yield guidance for its sale of 8 1/2- year euro-denominated notes for about a week, while U.K. rail and bus operator National Express Group Plc postponed its debut offering indefinitely, according to people familiar with the transactions.

Sovereign Crisis

“Concerns around Greece have spilled over into credit and brought issuance to next to nothing,” said Jeroen van den Broek, head of developed markets credit strategy at ING Groep NV in Amsterdam.

Greece’s credit rating was slashed three steps to BB+ by Standard & Poor’s April 27, the first time a euro member has lost its investment-grade ranking. The agency downgraded Portugal two notches to A-, four steps above junk, the same day and yesterday cut Spain one level to AA, the third-highest rating.

The cost of insuring the three countries’ debt fell from the record levels reached two days ago, as German Chancellor Angela Merkel and the International Monetary Fund pledged to step up efforts to overcome Greece’s fiscal crisis.

Bondholder Protection

Credit-default swaps on Greece dropped 89.5 basis points to 665 today, while contracts on Portugal declined 31 basis points to 302, according to CMA DataVision prices. Swaps on Spain fell 5 basis points to 182.

In London, the Markit iTraxx Europe Index of 125 companies with investment-grade ratings fell 6 basis points to 92, according to Markit Group Ltd. The index typically rises as investor confidence deteriorates and falls as it improves. The Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan dropped 6 basis points to 104.5, Royal Bank of Scotland Group Plc prices show.

In the U.S., the Markit CDX North America Investment Grade Index, declined 4.6 basis points to a mid-price of 94 basis points yesterday.

Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

Dubai International

Dubai International Capital LLC got backing for a $685 million debt refinancing, boosting efforts to keep its Almatis alumina-making unit.

JPMorgan Chase & Co. and Bank of America Merrill Lynch are preparing final term sheets and underwritten commitments for $350 million of senior secured notes and a $50 million revolving credit, Dubai International said in a letter yesterday to the company’s senior lenders. Blackstone’s GSO has agreed to arrange $185 million of senior subordinated securities and plans to manage the sale of another $100 million of senior secured debt for Frankfurt-based Almatis, the company said.

Dubai International is challenging a plan by Oaktree Capital Management LLC, the biggest of Almatis’s senior lenders, to seize control of the German unit, which violated loan terms last year.

The extra yield investors demand to own developing nations’ sovereign bonds over U.S. Treasuries declined 0.07 percentage point to 2.56 percentage points, according to JPMorgan’s EMBI+ Index.

Brazil’s Borrowing Costs

Brazil’s central bank became the first in Latin America in more than a year to raise borrowing costs, increasing its benchmark interest rate by 75 basis points to 9.5 percent. Economists surveyed by the central bank expect the $1.6 trillion economy to grow 6 percent this year, the second-fastest pace in more than two decades, with inflation above the government’s 4.5 percent target in 2010 and 2011.

Argentine bonds climbed a day after regulators in Italy, home to about a third of the $20 billion in defaulted bonds held out of a 2005 settlement, approved the South American nation’s plans to restructure the debt.

The extra yield investors demand to own junk bonds instead of Treasuries fell to 5.51 percentage points yesterday from a peak of 21.82 percentage points in December 2008, according to Bank of America Merrill Lynch’s U.S. High-Yield Master II index.

Companies failing to exploit the recovery in bond and equity markets to pay down debt are making a mistake, Michael Milken, the junk-bond billionaire turned philanthropist, told an audience at the Milken Global Institute conference yesterday in Beverly Hills, California.

Default Risks

“Defaults were exaggerated, the risks were exaggerated,” Milken said of the recovery in high-yield bonds. “Those risks existed in mortgage-backed securities, but they didn’t exist in industrial companies, and that’s what the market is saying.”

High-yield, or junk, bonds are ranked lower than Baa3 by Moody’s Investors Service and BBB- by S&P.

Wall Street banks began taking bets on pools of jumbo- mortgage bonds as trading started yesterday on four new credit- default-swaps indexes.

The PrimeX jumbo-mortgage bond indexes, administered by Markit, are similar to the ABX indexes tied to subprime debt that began in early 2006. Two of the PrimeX indexes are tied to fixed-rate loans and two track adjustable-rate mortgages.

GSO is marketing a floating-rate fund, the firm’s first product for individual investors, in which 80 percent of its managed assets are senior loans rated below investment grade, according a prospectus filed with the Securities and Exchange Commission on March 8.

Heather Lucania, a Blackstone spokeswoman, declined to comment.

BlackRock’s Fund

BlackRock’s fund will most likely invest 80 percent of its assets in a mix of senior secured floating-rate loans and debt, second lien or other subordinated or unsecured floating-rate loans and fixed-rate loans, or debt in which the fund has entered into a derivatives contract to convert them into floating-rate payments, according to an April 14 regulatory filing. Goldman Sachs Asset Management LP has also filed a prospectus to be the investment adviser on a new loan mutual fund.

Lauren Trengrove, a BlackRock spokeswoman, and Melissa Daly, of Goldman Sachs, declined to comment.

New funds will “bring normal liquidity back to the market,” said ING’s Bakalar, whose group has more than $10 billion of loans under management, with about 25 percent of that in mutual funds.

That will create demand for new loans from issuers that are strategic or private-equity driven, he said. “We’ll likely see more LBO and more M&A activity take place as a result.”