LONDON — U.S. money managers are muscling their way into the European leveraged loans market, drawn to what they believe is a source of fixed-income returns with plenty of opportunity.
The sector, once the domain of banks, has been swelling with cash inflows from institutional investors — primarily Europeans — looking to diversify in a low-yield environment for bonds, sources said.
Leveraged loans, or secured loans, fall below investment grade and generally track the London interbank offered rate. Because of their floating-rate structure, some investors prefer them over bonds if they think that long-term interest rates will eventually rise and drive down bond prices. In addition, leveraged loans are uncorrelated with other asset classes and has low volatility compared to other debt instruments.
New-issue leveraged loan volume for Europe totaled $148 billion in 2005, tripling the 2003 figures, with institutional investors holding about $69 billion, according to statistics from S&P. In comparison, new issues in the U.S. totaled $295 billion in 2005.
The market now is dominated by London-based managers such as Prudential M&G, AXA Investment Managers, European Credit Management Ltd., Intermediate Capital Group PLC and Henderson Global Investors Ltd. But an increasing number of American players are setting up shop in the U.K. capital for a piece of the action.
In June 2005, New York-based GoldenTree Asset Management LP opened a London office to capitalize on the returns potential of European credit-related investments. Eaton Vance Management, Boston, also opened a branch last year.