Liquidity premium becomes a highlight, pound junk loans usher in a "highlight moment".

Attention, the imminent increase in UK taxes, rising borrowing costs, and inflation rates far above the target level are all concerning. However, for UK corporate investors, there is at least a glimmer of hope: junk loans denominated in pounds. Leveraged loans denominated in pounds were once a neglected and illiquid corner of the corporate bond market, but they are currently experiencing a shining moment. Data shows that the issuance volume so far this year has reached 21.2 billion (approximately $27.9 billion), setting a yearly record with still two months to go. Among the five transactions above 1 billion that have been completed this year are the amended extension agreement for fuel station operator Motor Fuel Group, recent pricing for veterinary service provider IVC Evidensia, and a private credit loan for marketing company Clarion Events by Blackstone Group. With yield pressures in other regions, combined with the affordability of UK assets, the UK's stagnant economy is positioned favorably for leveraged financing, sparking a wave of acquisitions and subsequently driving the issuance of pound-denominated bonds. The euro and dollar syndicated loan markets are currently very hot, making it difficult for private credit companies to compete on pricing. However, pounds can provide the yield they need for profit. Bjorn Anderson, Managing Director of the leveraged finance team at Barclays, said, "We see that there is indeed demand among buyers for UK assets and pound-denominated issuing. Both banks and private credit participants are willing to subscribe to transactions." Insiders revealed that companies such as Apollo Global Management, Ares Capital, Blackstone, and KKR are all allocating private capital to pound-denominated leveraged loans. They also noted that some insurance companies are also investing in such assets. Record-breaking year for pound junk loans Some of the largest private equity transactions this year have involved UK assets, such as KKR's 4.2 billion acquisition of UK precision testing equipment and software manufacturer, SDL plc, and Advent International's $4.8 billion acquisition of most of the family care business of UK consumer goods company McBride plc. The acquisition of iconic British pharmacy chain Boots by Sycamore Partners is also part of a larger purchase of Walgreens Boots Alliance, in which investors have been eager to acquire the debt. Boots' pound-denominated loans offer a yield of 475 basis points, compared to 350 basis points for its dollar and euro loans. After the 2016 Brexit referendum, investor-led activities have increased in the UK, with the pound and stock valuations falling, making UK companies more attractive targets for American acquirers. Felicity Jukes of TwentyFour Asset Management said, "The fiscal and economic challenges facing the UK, as well as the liquidity premium, have driven up overall pound credit yields. This means there are opportunities, but you have to look for companies that can withstand these challenges." While the UK faces some fiscal and economic challenges, privatization rules are relatively straightforward. Operating in the UK is easier for American investors than in continental Europe, due to a common language, familiar legal system, and smoother restructuring processes. Liquidity Premium It is certain that pound bond issuance still only accounts for a small portion compared to euro and dollar-denominated bond supplies. Riskier corporate borrowing parties continue to favor capital pools with stronger liquidity, and the demand for collateralized loan obligations (CLOs) helps maintain competitive pricing. CLOs repackage leveraged loans into bonds with different risks and returns, making them the largest buyers in these markets. Among the hundreds of such investment instruments issued over the past 20 years, only a few have included pound components. In June, Ares issued the first all-pound CLO since 2018, supported by a basket of direct loans. In October, Barings' middle-market multi-currency CLO introduced pound shares for the first time in a decade. As the creation of CLOs reaches its peak, the leveraged loan market has been heavily traded. At various points this year, banks have even demanded premiums from investors looking to purchase loanscompletely opposite of the standard practice of selling at a discount to facilitate deals. This strong demand has driven down the yields on these loans. Data shows that the average yields for euro and dollar loans are 380 and 302 basis points respectively, as interest rate reductions make accepting risks easier. Pound Liquidity Premium However, CLOs are not the only option. For example, gaming company Intralot SA raised 400 million from private credit firms in July as part of its 1.56 billion three-tranche financing plan to acquire Bally's Corp.s online casino business. Since the deal includes UK assets, pound financing is a natural fit. Anderson of Barclays stated, "While pound acquisition financing may not have CLO support, it can be completed through a mix of bank and private credit financing for large transactions." Due to fewer buyers of pound loans, such assets enjoy a liquidity premium of at least 100 basis points, higher than similar assets denominated in euros and dollars. Data shows that the average pricing for B-class term loans denominated in pounds in the fourth quarter is 500 basis points. The attractiveness of these assets to investors is evident, but for borrowers, the situation is more complex. Many companies connected to the UK prefer to match the currency of their debt with their cost base or income. Doing so can also avoid potential high-cost forex swaps and difficulties in exiting these swaps when selling. The attractiveness of pounds suggests that some of the pessimism surrounding the UK may be overblown. In fact, UK government bonds, which have mostly performed poorly this year, are also rebounding. UK government bonds had their best performance in nearly two years in October, with 10-year bond yields nearing their lowest level since 2025. Jukes said, "When you talk to people around you, you'll find they're very pessimistic about the UK's prospects. But if you look at the economic data, the UK's GDP and some other indicators aren't actually that bad."