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Money markets key interbank lending rates ease

´╗┐* 3-mo Libor rate eases* 3-month euro/dollar cross currency basis swap narrows* U.S. money funds bank more aggressively on EuropeBy Ellen FreilichNEW YORK, March 21 After pricing out some of the expectations for a third round of quantitative monetary easing, some U.S. interest rates eased a bit on Wednesday, but in the interbank lending market, three-month Libor eased after having been flat for several days. The benchmark three-month London Interbank Offered Rate (LIBOR) fixed at 0.72357 percent on Wednesday, down from 0.73214 percent on Tuesday. The three month euro/dollar cross currency basis swap , another gauge of dollar funding risk, narrowed to minus 58 basis points, the tightest in nine months.

The measure, which widens in times of funding stress when investors compete for dollars, has gradually tightened from November's minus 167.5, a level not seen since the aftermath of Lehman Brothers' collapse in late 2008. The relaxation was said to be tied to good economic data, especially from the United States, and optimism among some investors about euro zone sovereign debt. Three-year loans from the European Central Bank (ECB) have also contributed mightily to alleviating worries about counterparty risk. After a week of mainly adding risk, investors tried the reverse tack on Wednesday with global stocks drifting lower and safe-haven government debt prices rising. Last month, however, the latest period for which data was available, figures on taxable money funds showed those funds ready to participate a little more aggressively on Europe.

Money fund holdings of French bank deposits, commercial paper and repo increased by 14 percent, returning to their October level. Since these holdings troughed in December, French bank exposures have increased by 72 percent, but are still half what they were in May 2011, said Barclays Capital market analyst Joseph Abate."After reducing their exposures too far, money funds appear to be looking for a 'happy medium' between the two extremes," he said.

Scandinavian, German, and UK holdings by money market funds were largely unchanged in February. Weighted average maturities of money fund European bank exposures also lengthened in February, consistent with overall market "risk on" sentiment, Abate said. As firms lock in low rates by borrowing for longer periods, the weighted average maturity on commercial paper outstanding has lengthened to 47 days from 39 in September, he said. As interbank lending rates have eased, money fund investors looking for returns benefited from increases in overnight repo rates from January's single-digit basis points to the low teens to mid-20s. The rise in repo rates combined with managers' willingness to extend average maturities has contributed to a marginal rise in money market yields, analysts said."Clearly, investors and businesses are growing more comfortable with the course of events, not just in the United States, but in Europe," Deborah A. Cunningham, chief investment officer for the taxable money markets and senior portfolio manager at Federated Investment Management Company, wrote in an analysis published earlier this month."On an historical basis, the current inflation rate combined with improving economic fundamentals would indicate the federal funds target rate easily could be 1 percent, or even 2 percent, and still be considered very accommodative," she said. "Indeed, in any other environment, a 1 percent target funds rate would seem extremely low. Now, it would seem like nirvana."

Rlpc european buyout loans face changes amid volatility

´╗┐Large buyout loans for European companies including insulation firm Armacell, publisher Springer Science+Business Media and industrial ceramics firm CeramTec could face expensive revisions to clear a volatile market, bankers said on WednesdayPricing on the loans is likely to be increased as investors demand higher pricing to better protect against risk. Dollar loans are likely to be reduced as rising pricing wipes out most of the cost savings of tapping the US market, the bankers said. Any revision will hit arranging banks in the pocket. Pricing increases are covered by market flex but have to be paid out of fees. Banks are also looking to boost flex terms on new deals going forward to protect against increased market risk."Any leveraged financing with a transatlantic flavour will see pricing increased," a European leveraged loan investor said. Many European companies have chosen to refinance new and existing buyouts in the US in the last year with a mix of euro and dollar loans to cut their financing costs. The benefits of tapping the liquid but volatile US term loan B market are now diminishing as risk-averse US investors stick closer to home and demand higher pricing."It is a double edged sword - liquidity may be greater in the US but it is going to cost more now given the volatility," a leveraged loan investor said.

Armacell cut the dollar tranche of a $425 million covenant-lite loan backing its buyout by Charterhouse Capital Partners and increased the euro tranche as well as boosting pricing on the deal. The company cut its U.S. dollar first-lien term loan to $185 million from $210 million and upped its euro-denominated loan to 120 million euros ($156.89 million) from 100 million euros. Dollar pricing was increased to 450 basis points (bps) over Libor from 350-375 bps over Libor and the discount was also upped. Euro pricing was also increased to 475 bps from 375-400bps with the same discount.

The pricing on an $85 million second-lien loan was also increased to 850bps over Libor with a 3 percent discount after original guidance of 725-750 bps and a 1 percent discount. FURTHER CHANGES The 2.5 billion euro buyout financing for Springer Science and the 1 billion euro buyout financing for Ceramtec [ID: nL5N0ET1I2] are in the spotlight as banks try to avoid being left overexposed over the summer period.

The euro-dollar mix and pricing of the deals is expected to change before launch, bankers said. Both deals were bid aggressively and have relatively high leverage of seven times earnings."I hope pricing is adjusted as investors need to be compensated for greater risk," a second leveraged loan investor said. Underwriting banks are wary of being unable to sell the deals over the quiet summer break after 2011, when arranging banks had to increase pricing on around 4 billion euros of loans that they were not able to place. Demand for loans is expected to hold up this year however, as investors rotate into floating rate loans to protect against rising interest rates and new Collateralised Loan Obligation Funds (CLOs) continue to be issued to buy leveraged loans. Deutsche Bank, Royal Bank of Canada and UBS have underwritten CeramTec, and six banks - Barclays, Credit Suisse, Goldman Sachs, JP Morgan, Nomura and UBS - have underwritten Springer."If times are good European borrowers can benefit from accessing dollars but if times are tougher then the hunt for US investment is something European borrowers may regret in a difficult market," a European sponsor said. ($1 = 0.7649 euros)