Attractive rates and longer maturity periods are luring private equity firms to replace leveraged loans with European high-yield bonds.
Loans were traditionally favored by financial sponsors over bonds because prepayment does not incur early payment penalties unlike bonds. However, the prospect that these punitive financial covenants will be shed has increased the appeal of bonds as a financing tool, even with its near double-digit rates.
According to some finance bankers, the loan market has become less appealing for issuers due to its floating rate which results in greater exposure to higher interest rates. In addition, loan covenants are stricter and have shorter maturity dates.
But this development has also created an opportunity for investors able to position themselves in loans. Financial analysts say that increased investor interest in loans could help rebalance the two markets.
"In the short term, it's still going to be high-yield largely, but I think if you look forward six months or 12 months, the European loan market is going to make a strong comeback," said Henrik Johnson head of high-yield and loan capital markets at Deutsche Bank.
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