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As leveraged loans boom, will private equity buyouts follow?

investment

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Demand for leveraged loans could well be the tail wagging the dog of private equity buyouts.

Money is pouring into leveraged loan funds at an incredible pace. It's a natural home for investors who are leery of buying bonds at this point in the cycle, when rates could be on the rise, but who still want credit exposure. Leveraged loans are usually floating rate. And that means protection from higher interest rates, unlike bonds, which will fall in price as rates rise.

The default performance has been solid as well, with the default rate a scant 1.4 per cent, well below historical averages (per Forbes).

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JP Morgan figures (via Sober Look) show we are coming off a record week in leveraged loan inflows, putting the past four weeks of flows into leveraged loans at the greatest in two years.

Fund managers are going to have to put that money to work, and issuers know it. Leveraged loan sales this year are up 9 per cent year to date, according to Thomson Reuters. But back out of Europe, and the number is much bigger. The U.S. leveraged loan issuance tally is up 14 per cent.

Even so, demand is swamping supply and pushing pricing down for borrowers, as Forbes lays out.

Add it up, and this points surely at more private equity activity.

Among the biggest users of the leveraged loan market are private equity firms who use the financing for buyouts. The leveraged loan boom will help refinance balance sheets of portfolio companies, and fuel more new takeovers.

Read the Globe's overview on floating-rate loans here.

(Boyd Erman is a Globe and Mail Capital Markets Reporter & Streetwise Columnist.)

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