BlackRock Joins Blackstone in Loan Fund Frenzy: Credit Markets

April 28 (Bloomberg) -- BlackRock Inc., the world’s largest asset manager, and Blackstone Group LP’s GSO Capital Partners LP are forming mutual funds to invest in loans as the London interbank offered rate rises to the highest level since August.

Within the past two months, the firms have joined Goldman Sachs Group Inc. in announcing funds that invest in leveraged loans pegged to short-term interest rates. Investors poured more than $2.5 billion into bank loan mutual-funds in March and the first three weeks of April, more than triple the amount for March and April last year, according to Lipper FMI data.

The Federal Reserve will likely raise its target rate for overnight loans between banks to 0.75 percent by the end of this year, up from 0.25 percent, according to the median estimate of 67 analysts surveyed by Bloomberg. The S&P/LSTA U.S. Leveraged Loan 100 Index has returned 5.68 percent this year, building on last year’s record 52 percent as lending continues to open up. New money “will provide financing, which will help” merger and acquisition deals get done, according to Invesco Ltd.’s Tom Ewald.

“That is a positive for all markets and the economy,” said Ewald, a New York-based money manager who runs the Invesco Floating Rate Fund at the firm, which has about $11 billion of leveraged-loans under management.

This year, $91.6 billion in leveraged loans have been underwritten, more than four times the figure from the same period in 2009, according to data compiled by Bloomberg. The interest charge on leveraged loans is typically tied to Libor. As rates rise, the overall coupon on a leveraged loan increases. Three-month Libor reached 0.338 percent today, the highest since Aug. 28, and up from a low 0.249 percent on Feb. 4, according to Bloomberg data.

Greek Aid

“This is one asset class that should perform well when short-term rates start to rise,” said Jeff Bakalar, co-head of the senior loan group at ING Investment Management. “It is one of a few natural hedges available to retail investors.”

Elsewhere in credit markets, ratings downgrades in Spain, Greece and Portugal led companies to pull European bond sales. Dubai International Capital LLC got a boost in its efforts to keep its Almatis alumina-making unit, with backing for a $685 million debt refinancing. Wall Street banks began taking bets on pools of jumbo-mortgage bonds as trading started today on four new credit-default-swaps indexes.

German Chancellor Angela Merkel and the International Monetary Fund pledged to step up efforts to overcome the Greek fiscal crisis. The country’s credit rating was slashed three steps to junk by S&P yesterday, the first time a euro member has lost its investment-grade ranking since the currency’s 1999 debut.

Greece, Portugal, Spain

The cost of insuring debt of Greece, Portugal and Spain from default fell from record levels yesterday.

Credit-default swaps on Greece dropped 74 basis points to 750, while contracts on Portugal declined 62 basis points to 321, according to CMA DataVision prices. Swaps on Spain fell 20 basis points to 189.

Casino Guichard-Perrachon SA, the biggest supermarket owner in Paris, withdrew initial yield guidance for its sale of eight- and-a-half-year euro-denominated notes for about a week, while U.K. rail and bus operator National Express Group Plc postponed its debut offering indefinitely, according to people familiar with the transactions.

“Concerns around Greece have spilled over into credit and brought issuance to next to nothing,” said Jeroen van den Broek, head of developed markets credit strategy at ING Groep NV in Amsterdam.

European iTraxx

In London, the Markit iTraxx Europe Index of 125 companies with investment-grade ratings rose 2 basis points to 98, according to Markit Group Ltd. The index typically rises as investor confidence deteriorates and falls as it improves. In the U.S., the Markit CDX North America Investment Grade Index, declined 4.6 basis points to a mid-price of 94 basis points.

Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

The extra yield investors demand to own developing nations’ sovereign bonds over U.S. Treasuries declined 0.07 percentage point to 2.56 percentage points, according to JPMorgan Chase & Co.’s EMBI+ Index.

Dubai International

Dubai International is challenging a plan by Oaktree Capital Management LLC, the biggest of Almatis’s senior lenders, to seize control of the company after the German unit violated loan terms last year.

JPMorgan and Bank of America Merrill Lynch are preparing final term sheets and underwritten commitments for $350 million of senior secured notes and a $50 million revolving credit, Dubai International said in a letter yesterday to the company’s senior lenders.

Argentine bonds climbed a day after regulators in Italy, home to about a third of the $20 billion in defaulted bonds held out of a 2005 settlement, approved the South American nation’s plans to restructure the debt.

The PrimeX jumbo-mortgage bond indexes, administered by Markit, are similar to the ABX indexes tied to subprime debt that began in early 2006. The four PrimeX indexes are each linked to 20 originally AAA rated securities from 18-month periods, ended June 30, 2006 and Dec. 31, 2007, according to a document on Markit’s Web site. Two of the indexes are tied to fixed-rate loans and two track adjustable-rate mortgages.

Junk Bonds

Junk bonds traded within a half cent of face value this week for the first time since June 2007 in a sign investors are convinced the economic recovery and profit growth will keep the neediest borrowers from defaulting.

High-yield bonds fell 0.2 cent to 99.47 cents on the dollar today, which compares with a low of 54.78 cents in December 2008, according to Bank of America Merrill Lynch index data. The debt last reached par on June 11, 2007, just before credit markets began to seize up as losses on subprime mortgages spread.

Speculative-grade debt is ranked below Baa3 by Moody’s and lower than BBB- by S&P.

Blackstone’s GSO is marketing a floating-rate fund, the firm’s first product for retail investors, in which 80 percent of its managed assets are senior loans rated below investment grade, according a prospectus filed with the Securities and Exchange Commission on March 8.

Heather Lucania, a Blackstone spokeswoman, declined to comment.

Investors are moving into loan retail funds partly out of caution that interest rates will rise, said Scott Page, money manager at Eaton Vance Corp. and group head overseeing $18 billion of loans. “People are scratching their heads and doing some “What ifs” about rising interest rates,” he said.

‘Normal Liquidity’

BlackRock’s fund will most likely invest 80 percent of its assets in a mix of senior secured floating-rate loans and debt, second lien or other subordinated or unsecured floating-rate loans and fixed rate loans, or debt in which the fund has entered into a derivatives contract to effectively convert them into floating-rate payments, according to an April 14 regulatory filing. Goldman Sachs Asset Management LP has also filed a prospectus to be the investment adviser on a new loan mutual fund.

Lauren Trengrove, a BlackRock spokeswoman, and Melissa Daly, of Goldman Sachs, declined to comment.

New funds will “bring normal liquidity back to the market,” said ING’s Bakalar, whose group has more than $10 billion of loans under management, with about 25 percent of that in mutual funds. “When there is new demand, supply typically follows.”

That will create demand for new loans from issuers that are strategic or private-equity driven, he said. “We’ll likely see more LBO and more M&A activity take place as a result.”

To contact the reporter on this story: Kristen Haunss in New York at khaunss@bloomberg.net