Asset – Credit Market

Asset – Credit Market
New World's Banker
WSJ, Aug 26, 2006

Some fear the U.S. credit markets are about to be submerged under a flood of leveraged buyouts. With a number of large deals seeking financing, that could mean higher borrowing costs and smaller profits for private-equity investors. The buyout kings have found a way around this potential crisis, however -- they are turning to Europe.

This year U.S. companies have raised $20 billion of leveraged loans outside America, according to Standard & Poor's Leveraged Commentary & Data. That's almost double the amount from the comparable period last year. The financing for HCA's record $33 billion buyout adds to this trend. More than a tenth of the institutional loans for HCA are expected to come from Europe. Yet only a small part of HCA's revenues originate in Europe.
Not long ago, American firms shied away from the European syndicated loan market. In the old days this market was dominated by banks, whose rigid practices made loans more expensive. Emsurope has since become more competitive. Several U.S. debt specialists, including Bain Capital's Sankaty Advisors, have set up shop there. European investment firms have also established specialist funds for leveraged loans. This influx of new investors has improved the position of borrowers. American firms often pay less on riskier dollar loans raised in Europe than at home.

The U.S. trade deficit is another reason why Americans are looking abroad. With a lot more cash going out of the country than coming in, U.S. leveraged buyouts could face financing constraints if they were restricted to domestic credit markets. Europe runs a trade surplus and, with lower interest rates, liquidity remains abundant. With a large number of leveraged loans in the pipeline, other issuers are likely to follow the example of HCA and head across the pond.