Cost of Corporate Debt Is on the Rise

Corporate loans are getting more expensive as HCA Inc., Kinder Morgan Inc. and Aramark Corp. seek a record amount of bank debt to pay for leveraged buyouts.

Standard & Poor’s says companies will seek $80 billion in loans over the next six months, the most since the company began keeping records on lending in 1998. Borrowers pay an average of 2.71 percentage points above benchmark interest rates for loans rated four or five levels below investment grade, compared with the record low of 2.27 percentage points in May.

HCA may have to pay about half a percentage point more than it expected on a $9.3-billion loan, the largest ever, according to three money managers who said they might buy some of the debt. Companies are competing for credit as Kohlberg Kravis Roberts & Co., Blackstone Group and Carlyle Group lead private equity firms in a record $402 billion of leveraged buyouts this year, according to data compiled by Bloomberg.

“Anytime you have an increased deal flow, investors and the investment banks benefit,” said Greg Stoeckle, the New York-based global head of the bank loan group at Invesco Inc., which manages $7.5 billion of loans. “The mega-deals will have to price wider to get everybody participating.” He declined to comment on specific loans.

Debt ranked less than BBB-minus by Standard & Poor’s or Baa3 by Moody’s Investors Service is considered below investment grade, or junk. Companies were seeking an average $45 billion at any one time with so-called leveraged loans through August this year.

HCA, the biggest U.S. hospital operator, is seeking $16.8 billion for its $33-billion leveraged buyout, the biggest ever. The $9.3-billion seven-year loan is almost double the previous record of $5.25 billion, which lumber company Georgia-Pacific Corp. received this year.

Nashville-based HCA may pay as much as 3 percentage points above the three-month London interbank offered rate, or Libor, said the investors, who declined to be named while they negotiate terms of the sale. Three-month Libor, a rate set daily by banks, is 5.37%. HCA in a regulatory filing last month said it expected to pay about 2.5 percentage points above Libor.

The purchase of HCA by Bain Capital, KKR, Merrill Lynch & Co. and HCA co-founder Thomas F. Frist Jr. will top KKR’s $31.3-billion leveraged buyout of RJR Nabisco Inc. in 1989.

“Supply and demand is a lot more balanced right now as compared to the beginning of the year,” said Scott Page, a money manager at Boston-based Eaton Vance Corp., which oversees $21 million of bank loans. “We have a nice equilibrium.”