Bankers eye growing market for US junk loans

Australia’s debt market is poised for upheaval as the growth of an institutional private loan market gathers pace amid subdued M&A activity, prominent bankers say. 

Michael Tierney, head of APAC leveraged finance at Credit Suisse, says the lack of local deal flow has created “huge demand” from Australian corporates for mezzanine funding.

Australian issuers are tapping the deeply liquid US market for high-yield and so called Term Loan B (or TLBs), drawn by their looser conditions.

Term B loans don’t need regular balance sheet checks and have maturities of up to seven years. They can also include “covenant-lite” features -- meaning they have less protection for investors than standard loans but offer a higher rate. 

“The big change going forward is… we are going to see an institutional private loan market, probably unrated initially, that is really going to change the market,” Tierney told private equity executives at AVCAL’s annual conference on the Gold Coast.  

“For the first time, we have competition (from the US) and sponsors have alternatives.” 

Westpac’s head of acquisition finance Russell Sinclair says the Term Loan B market is becoming competition for the Big Four banks in financing deals.

The TLB loans done by Australian issuers in the last six months or so have been largely re-capitalisations, but corporates are likely to try to move beyond that to tap the market to fund new buyouts.

Fortescue Metals started a trend among Australian issuers in October last year, by tapping US high-yield investors to avoid breaching its existing debt covenants in the face of a sliding iron ore price.

Atlas Iron, Nine Entertainment Group and Hoyts all followed suit.