As banks reopen their credit lines, investors are jostling for the lucrative yields, mainly offered by risky loans and bonds. The problem, however, is not so much the risk – but the lack of supply.
Europe has only seen eight deals from European issuers in the primary leveraged loan market this year, a far cry from the bonanza dominating the broader market. Issuance in traditional European syndicated loans, where deals are arranged by a group of banks on behalf of companies, hit $76bn in the year to February 21, or 18% more than last year.
Demand for existing loans in the secondary market has also been high. The average bid price on European loans rose from 83.4% of face value on July 9 last year to 92.2% on February 1, according to data from information provider Markit.
Lamoril said: “If [supply] remains limited then strong existing demand means you will see more aggressive behaviour, but probably not all arrangers will be able to follow.”
Such a move to riskier structures may not prove problematic at a time of strong demand, but if companies do not pay an appropriate price for risk, that could sow the seeds of future problems.
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