Improved liquidity in the European loan market and a pool of quality product is attracting U.S. investors. The draw to a market that has been "developing" for years is alternative supply, high yields and strong recovery values. "We're looking at it," said one buysider. There are good companies in Europe being brought to the loan market, he noted. "We want those companies in our portfolio."
According to figures published by the Loan Market Association, volume in the European secondary loan market was $39.5 billion in 2002 up from $30 billion in 2001. Additionally, the first quarter of 2003 got off to a running start. "First quarter results of the [LMA] survey will be available in about three week's time, but judging by our own performance, volumes should be up materially," noted one trader. "For example, our first quarter was 68% of total 2002." But one investor explained that the liquidity varies depending on the company. "Certain names are more liquid and other names trade by appointment," he said.
While the investment-grade loan market is the biggest market in Europe, U.S. investment in European loans is largely in distressed loans. "In regards to distressed bank loans, the bulk of what is sourced in Europe is placed in the U.S., said Stephen Snizek, director of Deutsche Bank's European secondary loan trading." United Pan-Europe Communications and NTL are examples of names where U.S. investors participated, he noted. U.S. investors appreciate the diversity and the bankruptcy law that is sometimes more favorable to lenders, he suggested. Another trader concurred, "European banks have been selling tons [of] distressed paper in the U.S." But he questioned, "When are they going to sell into their own back yard?" A $35 million piece of UPC's Euro-denominated tranche was shopped around last week in the U.S., according to a buysider. It could not be determined whether the piece traded. The bank debt for Telewest Communications and Callahan Nordhein-Westfalen also appears on axe sheets to U.S. investors.
The largest driver of liquidity in the European loan market continues to be commercial banks, but most recently the growth of European CDO managers who are more actively managing their portfolios has ignited further liquidity. CDOs that are fully invested have had to sell loans to buy new assets, which has sparked a pick up in secondary activity, said Snizek. The number of trades done on the leveraged side has increased while the average ticket size has decreased, he noted. Up ahead, some predict a consolidation in the financial services industry in Europe, which would make room for more institutional investors. "Europe is tremendously over-banked. Banks just don't make a lot of money," said one trader. "We are probably at the equivalent of 1994 in the U.S. The market is just getting its legs."