Bloomberg News

Junk Bonds, Funds to Bridge LBO Debt Gap in Europe, S&P Says

December 16, 2011

Dec. 15 (Bloomberg) -- A looming funding gap in the European leveraged loan market will be bridged by a combination of high-yield bonds, loans from retail investors and mezzanine funds in the next three years, Standard & Poor’s said.

Junk bonds will refinance the majority of about 69 billion euros ($90 billion) of European collateralized loan obligations that will reach the end of their reinvestment period by 2015 as the loans they hold mature, London-based analyst Taron Wade said in a report today. New money from retail investors, such as mutual funds, may also help fill the shortfall. The funds, absent in Europe, provide 30 percent of primary leveraged loans in the U.S., according to S&P.

Banks are increasingly reluctant to lend to leveraged buyouts as they brace for tougher capital requirements known as Basel III which will more than triple the core reserves that lenders must hold, Wade wrote. As a result, only one 858 million-euro CLO was raised in Europe, according to data compiled by Bloomberg, compared with $11 billion of CLO issuance in the U.S.

Mezzanine loans can also be used as a “short-term stop- gap” to fund companies unable to issue high-yield bonds, Wade said. Issuance of the junior-ranking loans is at an historic low this year at 880 million euros, down from 12.8 billion euros in 2007, according to S&P.

CLOs are a type of collateralized debt obligation that pool high-yield, high-risk loans and slice them into securities of varying risk and return. Speculative, or junk-rated, bonds are rated below BBB- by S&P and Fitch Ratings and Baa3 by Moody’s Investors Service.

--Editors: Cecile Gutscher, Paul Armstrong

To contact the reporter on this story: Stephen Morris in London at

To contact the editor responsible for this story: Faris Khan at

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