The riskiest U.S. companies are stepping up their borrowing inthe market for leveraged loans, with the amount of financingscompleted this year already exceeding what they raised in all of2012.

Borrowers from HJ Heinz Co. to Valeant PharmaceuticalsInternational Inc. have tapped non-bank lenders for $298.4 billionin 2013, more than the $295.3 billion obtained last year, accordingto Standard & Poor's Capital IQ Leveraged Commentary and Data.At the current pace, the record of $386.6 billion set in 2007 willbe eclipsed before year-end.

Rather than leveraging up, more than half of the loans made thisyear have been used to reduce interest costs or extend maturities,as companies take advantage of investor demand to strengthen theirbalance sheets. Investors added a record $2.1 billion last weekinto funds that buy loans, bringing the total for the year to morethan $40 billion, according to Bank of America Corp.

“We have seen significant demand” for high-yield, high-riskloans, said Scott Baskind, the co-chief investment officer for thesenior secured bank loan team in New York at Invesco Ltd., whichoversees $22 billion of the debt.

More loans that aren't tied to refinancings may be completed byyear-end as merger and acquisition activity heats up, Baskind said,following a 17 percent drop in the number of leveraged buyouts fromthe same period of 2012.

Loans have generated a return of 3.2 percent this year,according to the S&P/LSTA U.S. Leveraged Loan 100 Index. Thatcompares with gains of 3.04 percent on the Bloomberg High YieldIndex.

The average interest margin rose to 4.45 percentage points morethan benchmark rates in June from 3.7 percentage points in May amidconcern the Federal Reserve may begin to pull back from itsunprecedented stimulus. The gap shrank to 4.1 percentage pointslast month as those concerns eased, according to S&P LCD.

Elsewhere in credit markets, BMC Software Inc. is planning tosell $1.38 billion of notes denominated in dollars and euros tohelp fund its purchase by a group led by Bain Capital LLC andGolden Gate Capital. Wall Street banks are offering commercial-mortgage bonds at relative yields that are lower than on dealsissued earlier last month, aiding lenders with $5 billion oftransactions to sell. New York's Metropolitan TransportationAuthority obtained $200 million of protection with bonds designedto guard against wreckage linked to storm surges.

Swap Spreads

The U.S. two-year interest-rate swap spread, a measure of debtmarket stress, increased 0.3 basis point to 16.7 basis points. Thegauge widens when investors seek the perceived safety of governmentsecurities and narrows when they favor assets such as corporatebonds.

The cost of protecting corporate bonds from default fell. TheMarkit CDX North American Investment Grade Index, which investorsuse to hedge against losses or to speculate on creditworthiness,decreased one basis point to a mid-price of 74.6 basis points,according to prices compiled by Bloomberg.

The Markit iTraxx Europe Index of credit-default swaps tied to125 companies with investment-grade ratings fell 2.7 to 97.2 at10:48 a.m. in London. In the Asia-Pacific region, the Markit iTraxxAsia index of 40 investment-grade borrowers outside Japan decreased3.1 to 143.4.

The indexes typically fall as investor confidence improves andrise as it deteriorates. Credit-default swaps pay the buyer facevalue if a borrower fails to meet its obligations, less the valueof the defaulted debt. A basis point equals $1,000 annually on acontract protecting $10 million of debt.

Bonds of JPMorgan Chase & Co. were the most actively tradeddollar-denominated corporate securities by dealers, accounting for2.7 percent of the volume of dealer trades of $1 million or more,according to Trace, the bond-price reporting system of theFinancial Industry Regulatory Authority.

BMC is marketing $1.05 billion of securities and 250 millioneuros ($332.5 million) of debentures and may price the debt nextweek, according to a person with knowledge of the transaction. Theinformation technology provider announced the $6.9 billion buyout,which also includes investors GIC Special Investments Pte Ltd. andInsight Venture Partners, on May 6 after abandoning a sale lastyear. Proceeds will be placed in escrow until the acquisition iscompleted, the Houston-based company said in a statement.

Property Debt

Top-ranked 10-year securities linked to U.S. properties arebeing marketed by JPMorgan and Barclays Plc to yield as much as 108basis points more than the benchmark swap rate, a person withknowledge of the transaction said. Goldman Sachs Group Inc. andCitigroup Inc. sold similar notes on July 18 at a spread of 113basis points.

Dealers have arranged about $45 billion in commercial-mortgagebonds this year, according to data compiled by Bloomberg. Sales arepoised to double from 2012 to $70 billion by year-end, according toCredit Suisse Group AG.

New York City's subway operator is paying less than the cost oftraditional property coverage by buying protection from MetroCat ReLtd., a Bermuda-based special-purpose insurer that issued thethree-year securities, the MTA said in a statement. The bonds yield4.5 percentage points more than three-month Treasury bills,Bloomberg data show.

In emerging markets, relative yields widened 4 basis points to340 basis points, or 3.4 percentage points, according to JPMorgan'sEMBI Global index. The measure has averaged 298.7 basis points thisyear.

Loan Prices

The S&P/LSTA U.S. Leveraged Loan 100 Index fell 0.01 cent to98.24 cents on the dollar. The measure, which tracks the 100largest dollar-denominated first-lien leveraged loans, has declinedfrom 98.4 cents on July 23, the highest since May 30.

Leveraged loans and high-yield bonds are rated below Baa3 byMoody's Investors Service and lower than BBB- at S&P.

Investors have been pouring money into mutual funds that buyloans as a hedge against a possible rise in rates.

Mutual funds purchased 33 percent of loans sold to non-banklenders during the second quarter, up from 21 percent in the firstquarter, according to S&P LCD. Collateralized loan obligations(CLOs) remain the largest buyers of the debt, with a 53 percentshare, down from 60 percent during the first quarter.

Money managers have raised $52 billion of CLOs this yearglobally, compared with $55.7 billion in all of 2012, according toa July 26 JPMorgan report. CLOs are a type of collateralized debtobligation that pool high-yield, high-risk loans and slice theminto securities of varying risk and returns.

Speculative-grade borrowers obtained $157 billion of loans torefinance debt this year, while reducing the rate on $187.7 billionof existing loans, according to S&P LCD.

“You saw a pretty heavy repricing calendar in the first quarterand early second quarter of this year,” John Cokinos, the head ofleveraged finance capital markets and syndicate at Bank of Americain New York, said in a telephone interview.

Borrowers typically take advantage of a slowdown in mergeractivity and a rise in loan prices to seek a rate cut on theirloans, according to Cokinos.

Heinz obtained about $12 billion in loans backing the ketchupmakers acquisition by Warren Buffett's Berkshire Hathaway Inc. and3G Capital, Bloomberg data show.

Valeant got a $3.55 billion term deal as part of a transactionfinancing its purchase of Bausch & Lomb Holdings Inc.

Default Rates

The 12-month trailing global speculative-grade default rate fellto 2.8 percent at the end of the second quarter, from 3.1 percentin the same period last year, Moody's said July 11. The ratingsfirm expects the rate to rise to 3.2 percent by year-end, beforefalling to 2.7 percent by the end of the second quarter of2014.

Institutional loan issuance fell from $49.3 billion in May to$28.2 billion in June after Fed Chairman Ben S. Bernanke indicatedin testimony to lawmakers that the central bank may reduce the $85billion it spends every month buying Treasuries and mortgage bonds.The central bank pledged to keep buying the bonds yesterday, theFederal Open Market Committee said after a two-day meeting inWashington.

The initial Fed statement “had a significant impact,” and “wesaw a global pullback in fixed income, emerging markets, investmentgrade, and high yield, and that caused a broad correction in themarket,” Invesco's Baskind said.

Junk Outflows

High-yield bond funds, which had been buying loans, saw outflowsof $12.6 billion in May and June, according to data fromMorningstar Inc. That led some investors to sell their loanholdings, said Joe Moroney, a senior money manager who helps runthe senior credit business at Apollo Global Management LLC in NewYork.

While loan issuance slowed in June and July, a recent pickup inmerger activity may mean new debt financings in coming months.Merger and acquisition volume rose to $111 billion in July, anincrease from $71 billion in June, according to a July 30 Bank ofAmerica report.

Hudson's Bay Co., Canada's biggest department store operator,has obtained $2.8 billion of debt financing commitments to back itsacquisition of Saks Inc., according to a July 30 regulatory filing.Community Health Systems Inc., the second-largest U.S. hospitalchain, obtained $6.8 billion in loan commitments backing itspurchase of Health Management Associates.

“There is some larger M&A activity coming that is going toprovide some good opportunity in terms of sizable transactions,”Baskind said.

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