The growing importance of "B" and "C" tranches and the emergence of non-bank investors are the major themes in European leveraged loans, according to Stan Sokolowski, a v.p. with J.P. Morgan's loan group in London. There are currently 10 new loan-based vehicles in the pipeline. These include CLOs for European-based entities, but also for U.S.-based investors migrating to Europe such as INVESCO and PIMCO, Sokolowski said.
These trends are leading to signs of progress, in a market that is constantly expected to explode, such as a greater emphasis on risk and reward. Sokolowski used the example of NTL's $4.5 billion loan, which was bought in the secondary market at a discount by loan investors. He also pointed out that a broker market is developing, with 16 desks operating in London and more setting up. Expanded ratings research, further standardization and a greater emphasis on portfolio management is emerging, he added.
But despite the dramatic growth, Europe is still five-to-10 years behind the U.S., he cautioned, noting that an over-crowded banking space is still a major problem. "They need to do a lot of merging," he said of the European banks. In comparison to the U.S. where the banks comprise about one-third of the market, the picture is inverted with the loan funds being in the minority.