Many investors are shunning the riskiest corners of the junk-rated U.S. corporate loan market because of concerns about possible credit rating downgrades, putting the brakes on a run of leveraged buyouts and debt-funded dividends.
The push back against the riskiest corporate debt shows how
the Federal Reserve has failed to alleviate fears about a recession next year that would trigger a cash crunch for heavily indebted companies, corporate financiers and analysts said. Rock-bottom interest rates have fueled a boom in junk rated loans, with the U.S. market tripling in size to $1.3 trillion since 2010 as investors bet on riskier assets, allowing private equity firms to juice their returns and pursue even bigger acquisitions.
But some of these M&A deals look less feasible given the loan market’s unease.
Drug store chain operator Walgreens Boots Alliance Inc, for example, got a skeptical response from private equity firms for its potential $70 billion-plus leveraged buyout, Reuters reported earlier this month.
Private equity investors use leveraged loans to fund purchases of companies with a lot of debt, resulting in credit ratings at the lower end of the spectrum. But the more cautious mood in the market about where the U.S. economy is headed has made loan investors insist on stricter terms, including higher interest rates.
This could ultimately restrict access to capital for the most heavily leveraged companies, preventing them from refinancing their debt, capital markets experts said.
- Reuters
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