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Loan Prices Reach Two-Year High as Apax Borrows: Credit Markets

Prices of high-yield loans in Europe hit a two-year high as the improving outlook for corporate defaults and the economy open up financing for leveraged buyouts.

The average price for actively traded so-called leveraged loans climbed 7 basis points to 96.07 percent of face value since Jan. 1, according to Standard & Poor’s Leveraged Commentary & Data. The price of the debt, mostly used to finance mergers and acquisitions, reached the highest level since Dec. 13, 2007. A year ago, loans traded at 60.4 percent of face value.

Demand for riskier assets is returning as Moody’s Investors Service forecasts that the default rate among speculative-grade companies will drop to 3.3 percent this year from 12.5 percent now. London-based private-equity firm Apax Partners LLP is raising 315 million pounds ($517 million) to finance its acquisition of Marken Ltd. in the first European LBO this year, according to data compiled by Bloomberg.

“Investors are now looking at leveraged loans as a product offering attractive yields with limited downside,” said Edward Eyerman, head of leveraged finance at Fitch Ratings in London.

Elsewhere in credit markets, the extra yield investors demand to own European investment-grade corporate bonds rather than government debt increased 1 basis point to 152, near the lowest level since February 2008, according to Bank of America Merrill Lynch index data. The spread on the European high-yield index narrowed 1 basis point to 699. A basis point is 0.01 percentage point.

Spreads Narrow

Spreads on investment-grade debt will narrow 20 basis points over the “near term” from 125 basis points now because of government measures to combat the credit crisis, Moody’s said yesterday in a report. Bonds rated below Baa3 by Moody’s and BBB- by Standard & Poor’s are considered below investment grade.

Credit Suisse Group AG, Switzerland’s biggest bank by market value, sold 2.25 billion euros ($3.24 billion) of seven- year notes yesterday in its first deal in the currency since Dec. 2, according to data compiled by Bloomberg. The 3.875 percent securities due in seven years were the only European benchmark corporate notes yesterday, a U.S. holiday, compared with a daily average of 5.3 billion euros.

Slovenia sold 1.5 billion euros of 10-year bonds, joining governments from Mexico to Indonesia in the busiest start to a year for developing-nation foreign borrowing in a decade. Officials from Vietnam are meeting with investors in London today to market a $1 billion offering of 10-year notes. Albania plans to sell its first international bonds and is preparing to hire a bank to manage a sale of 300 million euros in three- or five-year notes, the Finance Ministry said.

Credit-Default Swaps

The cost of insuring against losses on European corporate bonds using credit-default swaps fell to near the lowest level in 19 months. The high-yield Markit iTraxx Crossover Index dropped 9 basis points to 404, according to JPMorgan Chase & Co. prices. The index is a benchmark for the cost of protecting bonds against default and a decline signals an improvement in perceptions of credit quality.

Credit-default swaps on Greek debt fell to 313 basis points from a record 344.5 on Jan. 14, according to CMA DataVision prices. European government officials met in Brussels yesterday to discuss Greece’s deteriorating finances.

Swaps on Iceland, whose economy buckled in October 2008 under $80 billion of debt at its three largest banks, rose 1.5 basis points to 545, CMA prices show. The nation’s credit risk may rise “considerably” should a proposed emergency bailout fail and its government collapse, S&P said yesterday.

‘Fragile’ Recovery

The Markit iTraxx SovX Western Europe Index of default swaps on 15 European countries fell 3 basis points to 76 yesterday, after rising to a record 78.5 from 46 when it started trading in September, according to CMA. At the high point, it cost $78,500 a year to protect $10 million of debt from default for five years.

International Monetary Fund Managing Director Dominique Strauss-Kahn said yesterday it’s too early for policy makers to withdraw stimulus measures, describing the recovery as “fragile.”

Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements.

Contracts on Northfield, Illinois-based Kraft Foods Inc. rose 1 basis point to 76.5, CMA said. The company is in talks to increase its bid for Cadbury Plc to as much as 12.1 billion pounds, according to a person with knowledge of the matter. Swaps tied to bonds sold by Uxbridge, England-based Cadbury climbed 5 basis points to 76.5, CMA prices show.

Leveraged Loans

Leveraged loans in Europe will return between 7 percent and 9 percent this year, Barclays Capital forecasts. Investors have earned a 1.27 percent return on the debt this year, the London- based bank’s data show.

“A lot of companies refinanced their loans at par in the bond market so that drives returns,” said Axel Potthof, senior vice president of Allianz Global Investors in Munich.

Lloyds Banking Group Plc is arranging the loan for Apax, according to a person familiar with the plans. Apax didn’t disclose the price for the U.K. vaccine courier when it agreed to buy Marken from Intermediate Capital Group Plc last month.

The loan includes 150 million pounds of six-year term loans that pay 4.5 percentage points more than benchmark rates, 150 million pounds of seven-year debt with a spread of 5 percentage points and a 15 million-pound, seven-year revolving credit with a 4.5 percentage-point spread, according to the person.

Fiona Mulcahy, a London-based external spokeswoman for Apax, declined to comment.

LBO Debt

When Apax bought a stake in U.K. publisher Trader Media Group Ltd. in 2007, it paid interest margins on loans of 2.25 percentage points, Bloomberg data show. Marken’s debt equals four times its earnings before interest, tax, depreciation and amortization, the person said.

The LBO market, where buyers acquire companies using mostly debt financing, collapsed in 2007 when underwriters got stuck with $200 billion of loans they couldn’t sell as credit markets froze. Demand for higher-yielding securities is increasing again as Europe’s economy returns to growth.

The region will expand 1.4 percent in 2010, according to the median forecast of economists surveyed by Bloomberg News. Growth resumed in the third quarter as governments stepped up spending and exports increased for the first time in 1 1/2 years, the European Union’s statistics office in Luxembourg said Dec. 3. Gross domestic product in the 16-nation euro region rose 0.4 percent from the second quarter, when it dropped 0.2 percent.

“If you’re a high-yield bond investor, you can buy another new bond, but if you are a loan investor, you don’t have that option, you will need to reinvest in the secondary market,” said Alex Moss, a fund manager at Insight Investment Management in London.

Jan

21

2010

Bank of America’s $19.3 Billion Is Biggest U.S. Sale Since 2000

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Bank of America Corp., the largest U.S. lender, raised $19.3 billion selling securities at $15 apiece in the biggest sale of stock or preferred shares by a U.S. public company since at least 2000.

The bank, which plans to repay $45 billion of U.S. rescue funds, sold 1.286 billion so-called common equivalent securities, according to Bloomberg data. The security is made up of one depositary share and one warrant and is convertible into one common share, subject to stockholder approval, according to a regulatory filing by the Charlotte, North Carolina-based bank.

Bank of America plans to use the proceeds to free itself from government restrictions after accepting funds from the Troubled Asset Relief Program. Banks, brokerages and insurers have raised $1.5 trillion to shore up capital after the biggest financial crisis since the Great Depression spurred more than $1.7 trillion in writedowns and credit losses globally.

“It’s a good thing for Bank of America, it’s a healthy thing and it needs to happen,” said Jason Brady, a managing director of Santa Fe, New Mexico-based Thornburg Investment Management, whose $4 billion Thornburg Income Builder Fund owns Bank of America bonds. “It doesn’t mean necessarily that Bank of America stock is a wonderful investment because they spent a bunch of money to get the government out of the way.”

In May, Bank of America raised $13.5 billion issuing 1.25 billion common shares at $10.77 each in response to government stress tests and to help cushion losses tied to the takeover of Merrill Lynch & Co. The tests gauged the ability of banks to absorb losses in an extended recession, prompting Bank of America to boost capital by almost $40 billion.

Succession Battle

The repayment may ease efforts to replace Chief Executive Officer Kenneth D. Lewis, who’s leaving the bank Dec. 31. His successor inherits a company ranked first by assets and deposits in the U.S. The plan saves billions of dollars in TARP dividends and ends extra U.S. oversight of operations and salaries, Wells Fargo Advisors analyst Matthew Burnell wrote.

“Repaying TARP is going to allow a lot more flexibility for the incoming CEO as he handpicks his individual management team,” said Todd Hagerman, an analyst in New York with Collins Stewart Plc, who has a “buy” rating on Bank of America.

Bank of America rose 11 cents to $15.76 yesterday after advancing as much as 7 percent. Michael Mayo of Calyon Securities USA Inc. raised his rating to “outperform” from “underperform” and boosted his target to $19 from $12, which had been the lowest among analysts surveyed by Bloomberg.

The bank plans to repay the U.S. using $26.2 billion of cash and the proceeds from the share sale, according to a statement. It expects to increase equity by $4 billion through asset sales and will issue $1.7 billion of restricted stock instead of year-end bonuses to some employees.

Wells Fargo & Co., based in San Francisco, raised $8.6 billion in May in a secondary offering, while Goldman Sachs Group Inc. sold $5.75 billion in shares in April. Wells Fargo accepted $25 billion in TARP funds last year. Goldman has repaid $10 billion received through the program.

Dec

03

2009

Bank of America to repay TARP

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Bank of America Corp said it would repay $45 billion of taxpayer bailout funds, a move that could free the top U.S. lender from pay curbs as it looks to hire a new CEO but also makes it more vulnerable to further economic shocks.

The surprise announcement on Wednesday marks a victory for outgoing Chief Executive Kenneth Lewis, who is expected to retire from his post by the end of the year. Lewis has said that repaying the government was something he wanted to accomplish before stepping down.

The announcement is also a shot in the arm for the U.S. Treasury, which has been under fire for the hundreds of billions in taxpayer dollars it has shelled out to corporate America during the financial crisis.

The Charlotte, North Carolina-based banking leader is expected to repay its Troubled Asset Relief Program (TARP) funds over the next few days.

Bank observers said Bank of America’s repayment may be the first in a wave of TARP repayments by major U.S. banks that have yet to repay the government bailout funds, including Citigroup Inc and Wells Fargo & Co.

“Once the dam is broken, my bet is we’re going to see other institutions announce total or partial repayment plans,” said Tony Plath, banking professor at University of North Carolina- Charlotte.

The U.S. government injected $45 billion into Citigroup, while Wells Fargo received $25 billion.

A U.S. Treasury official called the repayment a step in the right direction, adding that replacing Treasury investments with private capital would provide a boost to confidence.

Bank of America Chief Risk Officer Greg Curl, considered a leading contender to replace Lewis, played an instrumental role in gaining the government’s permission to repay the TARP funds. His success could bolster his chances as a contender for the CEO position, according to financial industry sources.

“It’s a feather in his cap,” said Anton Schutz, president of Mendon Capital in Rochester, New York.

The announcement comes as the bank has bristled under U.S. pay czar Kenneth Feinberg’s curbs on senior management compensation. It has repeatedly expressed its interest in repaying the funds as soon as possible.

In an interview with Reuters, Feinberg called the bank’s plan to repay TARP money “very satisfying” and said it was “exactly the goal” of his oversight.

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Dec

03

2009

BofA May Name Stopgap CEO If Board Needs More Time for Search

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Bank of America Corp.’s board may extend its search for a new, permanent chief executive officer into 2010 if directors can’t settle on a candidate in the next four days, according to people familiar with the matter.

The directors, who met Nov. 20, may be willing to go past their Nov. 26 target and the Dec. 31 retirement of CEO Kenneth D. Lewis if it means getting a better choice, according to a person familiar with the deliberations. At least four external candidates, including Citigroup Inc. director Michael O’Neill, rebuffed approaches. Options include an interim chief or a delay in Lewis’s retirement.

Bank of America faces pressure to pick someone in a short period who’s acceptable to regulators and whose pay would be low enough to win approval from the Treasury Department paymaster, the people said. Politics also has influenced the choice at the biggest U.S. bank, the people said. House Oversight Committee Chairman Edolphus Towns said last week Brian Moynihan, one of two internal candidates, may lack the needed leadership.

That’s narrowing the field and giving the board “an incredibly tough job,” said Michael Holland, who oversees more than $4 billion as chairman of Holland & Co. in New York. “For people who have choices, it’s hard to figure out why someone would take this job.”

The people familiar with the matter spoke before any board meetings this weekend. They declined to be identified because CEO selection is confidential at the Charlotte, North Carolina- based bank, the biggest in the U.S.

Decision Nears

Bank of America representatives have said the bank was aiming for a decision by the Nov. 26 Thanksgiving holiday, calling it a target rather than a deadline. “The board has been talking to a number of candidates, both internal and external, and expects to have a decision in the very near future,” spokesman Robert Stickler said in a Nov. 20 e-mail.

Holland said director Charles K. “Chad” Gifford, a former CEO of FleetBoston Financial Corp., which was bought by Bank of America in 2004, could step in on an interim basis.

Some candidates are reluctant to wade into disagreement between board members and the government over the bank’s future strategy, said Rochdale Securities LLC analyst Richard Bove, citing large shareholders briefed on the matter.

“The government and perhaps some of the new directors want the bank cut back in size, while the old core Bank of America people don’t want to do that,” Bove said.

Dropping Out

O’Neill, a former chief financial officer of predecessor BankAmerica Corp., withdrew from consideration after talking with search-committee members because he felt they didn’t fully grasp how serious regulators are in their demands for change, the people said.

O’Neill told the committee members that the company needed to increase the size of its banking operations and shrink its trading business, one person briefed on the talks said. The committee members responded that such a shift would be unproductive because it would abandon the strategy set when Lewis bought Merrill Lynch & Co., the person said.

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Nov

23

2009

Government Backed $4.3 Trillion in Assets Last Year

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The U.S. government guaranteed as much as $4.3 trillion in financial assets last year, making such backstops the biggest and riskiest part of Washington’s response to the financial crisis, a bailout watchdog panel said on Friday.

The Congressional Oversight Panel said in its latest monthly report that the asset guarantees from the U.S. Treasury, the Federal Reserve and the Federal Deposit Insurance Corp helped calm panic in financial markets at minimal cost to taxpayers so far.

To date, the programs have generated fees of about $17.4 billion, while only up to $2 million is expected to be paid out for a default under the FDIC’s bank debt guarantee program.

The report said for program that once guaranteed a pool of $301 billion in Citigroup assets, initial actuarial estimates point towards a possible loss of $34.6 billion under a “moderate” stress scenario.

But since Citigroup must absorb the first $39.5 billion in losses from these assets, taxpayers would not be liable for any of this. A “severe” stress test scenario would result in losses of $43.9 billion, of which taxpayers would have to absorb nearly $4 billion.

The panel, charged with overseeing the U.S. Treasury’s $700 billion Troubled Asset Relief Program, said that as financial markets stabilize and the scope of the guarantee programs decrease, the likelihood of major expenditures also diminishes.

“This apparently positive outcome, however, was achieved at the price of a significant amount of risk,” the panel said in the report. “A significant element of moral hazard has been injected into the financial system and a very large amount of money remains at risk.”

Elizabeth Warren, the Harvard Law School professor who heads the Congressional Oversight panel, said the guarantees also produced significant distortions in private markets, drawing funds to assets that had backstops.

“The fact that there is no upfront cost is both the beauty and danger of guarantees,” she told a conference call on the report. “They are perhaps too tempting.”

The majority of the $4.3 trillion that the government guaranteed came from a money market mutual fund guarantee program aimed at preventing massive withdrawals of such funds in the fall of 2008. At its height, the program guaranteed $3.217 trillion in money market fund assets.

Among other programs reviewed in the report, the FDIC debt guarantee program currently backstops about $307 billion in outstanding obligations.

The watchdog panel said it did not identify any significant flaws in the Treasury’s implementation of its programs and noted that Treasury has taken a more aggressive stance in safeguarding taxpayer funds.

But it recommended that the Treasury disclose more information on the rationale and justifications for creating the money market guarantee program, and explanations of why Citigroup and Bank of America were the only institutions selected for asset guarantee protection.

It also asked for more updates on the pool of Citigroup assets, now estimated at $266.4 billion, including total and projected losses.

Nov

09

2009

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