Yield-hungry commercial banks were among the buyers in last week's auction of USL Capital's $450 million portfolio of below-investment-grade loans.
More than 50 investors, including banks, prime rate funds and insurance companies made bids for the portfolio of 23 B-rated bank loans, according to executives at J.P. Morgan & Co. which led the auction. The portfolio included debt from such companies as Bruno's Inc., Pathmark Stores Inc., and Riverwood International.
The deal for USL, a San Francisco-based subsidiary of Ford Motor Co., came to market at a particularly good time, said Diane J. Mardini, a loan trader at J.P. Morgan & Co. She pointed out that the supply of newly originated loans has slowed recently, enhancing the interest in USL's portfolio.
"As further evidence of loan market liquidity, we have three new investors in bank loans in the last month," added Martin Pryor, a Morgan vice president.
Among the investors who made bids for the loans - which were sold in 45 lots - only 15 were successful. Morgan declined to identify the buyers by name.
Ms. Mardini said that many of the loans traded above par, which experts said is particularly impressive for bank loans. The loans do not provide call protection - which shields investors against early prepayment.
"If the average leveraged loan is not refinanced for four months, the prime-rate mutual funds are still better off buying loans" than commercial paper or treasury securities, said Walter Bloomenthal, a senior managing director with BankAmerica Corp.
"To the extent you have floating-rate bank loans that are at or around par, you probably have greater liquidity than a high-yield bond portfolio," he said.
That would not have been the case three years ago, when the market for bank loans wasn't quite as active and deep.
J.P. Morgan has led the liquidation of several loan portfolios in the last six months, including a sale of approximately $700 million for Daiwa Bank in December.
Bank loans represented the largest asset class of another recent USL sale of securities, bringing in much of the returns on a $670 million sale that included corporate bonds and adjustable-rate preferred stock.
Ford has been selling off USL Capital since It sold USL Rail Services for approximately $900 million, and the Fleet Services unit for about $875 million.
The motor company said it expects to complete the sale of a majority of USL's assets by the end of the summer.
USL was purchased by Ford in 1987 for $512 million.
