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Barclays leads European banks' pursuit of risky US debt
WHEN an indebted infant healthcare company in Atlanta wanted to borrow hundreds of millions of dollars to buy a rival in Pasadena, it turned to a lender thousands of miles away in London.
Barclays plc is helping Aveanna Healthcare LLC get a US$221 million loan for its purchase of Premier Healthcare Services LLC, adding to a US$900 million debt last year. The deal will push Aveanna's borrowings to more than 10 times its earnings, and leave it with "little room for error", S&P Global Ratings said.
The proposed loan is among tens of billions of dollars of borrowings that European lenders are arranging for riskier American clients, a business that they are targeting to ease the pain from revenue slumps in other areas.
They are so keen to take market share from their US rivals that even Deutsche Bank AG, the embattled lender that is giving up much of its Wall Street ambition, has earmarked more funds for such deals.
Now, some observers have warned that they are pushing into a borrowing binge that has spooked some of the world's biggest money managers, and has been described by the Bank of England as a risk to financial stability.
Increased competition may be enabling companies to borrow more than they should, and on increasingly loose terms, said investors and even some people inside the banks.
"This gain in market share appears to result from European banks' willingness to stretch even further on leverage levels, structure and pricing," said Michael Barnes, co-chief investment officer at Tricadia Capital Management LLC in New York. "As is typical of all credit cycles, it is a race to the bottom."
The Aveanna deal is a snapshot of the surging US market for leveraged loans, which lenders arrange for highly indebted corporations - often to fund acquisitions, or allow dividend payments to the private equity investors that own many of them.
Banks and other firms structured US$494 billion of new debts last year, the most since at least 2011 and roughly the equivalent of the gross domestic product of Poland. After a strong first half, they are on track to create even more in 2018, data compiled by Bloomberg show.
Europe's biggest lenders are trying to cash in on the borrowing spree. Eight banks from the continent arranged some US$62 billion of new US leveraged loans in the first half of this year, compared with US$53 billion a year earlier, increasing their combined market share to almost 24 per cent, according to data compiled by Bloomberg. The figures include revolving lines of credit that are often part of such deals, and exclude refinancings of old loans.
The Europeans are led by Barclays, where chief executive officer Jes Staley has targeted leveraged finance as an area for growth since taking charge in 2015. The UK bank, which bought the US operations of Lehman Brothers Holdings Inc after its collapse, has more than 6 per cent of the market for new loans and is on track to be the third-biggest arranger this year. That would be its highest ranking since 2014, the data show.
"Barclays operates in compliance with the rigorous leverage finance guidance provided by the regulators," said Jon Laycock, a spokesman for the lender. "In addition, we have a thorough internal credit risk process, and we always ensure that we allocate our balance sheet to drive the best outcomes for both our clients and our shareholders."
Credit Suisse Group AG, Barclays' biggest European rival in the US so far this year, has increased hiring in leveraged finance as it wagers that the market's explosive growth will continue, Bloomberg has reported.
At eighth-placed Deutsche Bank, which is firing thousands of workers and pulling back from other US businesses, chief executive officer Christian Sewing wants to make more leveraged loans.
Senior managers have embarked on a charm offensive in recent weeks with leaders of the US private equity firms that control many of the non-investment grade borrowers, people familiar with the matter have told Bloomberg. The bank has increased the amount of money available for such deals.
HSBC Holdings plc, the London-based bank known for its focus on Asia, has quietly been adding US private equity clients as it builds up its business, a person familiar with its strategy said, and has bolstered its market share along with UBS Group AG, BNP Paribas SA and ING Groep NV.
Credit Agricole SA, the lender based in a Parisian suburb, arranged US$2.3 billion of new US leveraged loans in the first half of the year, almost as much as its total for all of 2017, the data show.
Credit Agricole's approach is "driven by our worldwide relationship with leading, global financial sponsors and not on a market share imperative", said Mischa Zabotin, who oversees the French bank's relationships with private equity funds in the Americas. BLOOMBERG