The banks that would usually finance these deals, are becoming more and more focused on distributing their loans, thus showing a much lower direct economic interest in the loans.

Leveraged loans are essentially loans with a high rate of interest to reflect a higher risk posed by the borrower. A higher than normal debt implies that the funding is riskier, and therefore more costly, than normal borrowing. As a result, levered finance is commonly employed to achieve a specific, often temporary objective.

In an interview with Reuters, Andrew Merrett, director in the European special situations team at Close Brothers said, “Not only are hedge funds here to stay, but this research shows just how influential they now are with the controlling positions they hold in the leveraged loan market,”

“Although we see this as a positive development, the fact remains that hedge funds behave in a very different way to traditional lenders … in leveraged or distressed situations, it’s hedge funds calling the shots from the creditors’ camp,” he said.

The European leveraged loan market has grown in recent years, and hedge funds are known to behave more aggressively in this more volatile market, “Where there is a risk of default, they are forced to sell debt into the secondary market, where it is typically bought by distressed debt traders and hedge funds,” the Close Brothers report said, “This further encourages traditional-relationship banks to sell problem loans into the secondary market rather than work them out.”

Alex Akesson
Contributing Writer
HedgeCo.Net
Email: Editor@hedgeco.net