Junk-rated borrowers from Rite Aid Corp. to Atkins Nutritionals Holdings Inc. are raising a riskier type of loan that offers a lesser claim on their assets at a pace last seen before the financial crisis.
Second-lien loan issuance has climbed to $17.1 billion this year, versus $18.6 billion in all of last year and on pace to surpass the record $28.7 billion issued in 2007, according to data compiled by Bloomberg. Rite Aid, the third-largest U.S. drugstore chain, reduced the interest rate on its $500 million loan due to increased investor demand, while dieting company Atkins raised $355 million in loans, including second-lien debt, to fund a dividend.
Investors are turning to the junior-ranking loans that would shield them from an increase in interest rates and offer more protection than bonds, which have been pummeled as speculation increases the Federal Reserve will pare back its unprecedented stimulus. Second-lien loans have fallen just 0.3 percent since Fed Chairman Ben S. Bernanke said the central bank could reduce its asset purchases if the economy shows sustained improvement, while junk bonds have lost 9 times more.
“A second-lien loan is effectively a high-yield bond in disguise,” John Bell, who co-manages $4.4 billion in fixed- income assets at Loomis Sayles & Co. in Boston, said in a telephone interview. “There’s notably more yield and low- default expectations in general on the demand side.”
Second-Lien Premium
The extra interest that investors demand over the London interbank offered rate to hold second-lien debt fell to 7.7 percentage points on June 6, from 9.1 percentage points at the start of the year, according to Standard & Poor’s Capital IQ Leveraged Commentary and Data.
First-lien loans, which generally provide the highest claims on a company’s assets in the event of a default, paid an average 3.84 percentage points more than Libor last week, according to S&P LCD. Three-month Libor was set at 0.27 percent yesterday.
The trailing 12-month leveraged loan default rate declined to 2.5 percent last month, from 2.9 percent in April, according to a June 10 Moody’s Investors Service report. That compares with 9.4 percent in August 2009, according to the New York-based ratings firm.
“In a benign default environment investors are willing to step down the capital structure,” Scott Baskind, a New York- based senior money manager for Invesco Ltd.’s bank loan group, said in a telephone interview. “Investors have been looking for risk assets that would provide juicier yields. The demand side of the market remains very strong.”
Default Swaps