Alcentra says sub-investment grade leveraged loans are becoming an accepted asset class in Europe as the market develops. Institutional investors are the norm in Europe compared with retail in the US.

Europe's sub-investment grade leveraged loan market is taking off, according to Paul Hatfield, chief investment officer at Alcentra.

Alcentra believes companies are turning to the secured loan market as they find access to the high-yield bond market restricted because of perceptions of global risk and a desire to shorten duration.

The asset management group focuses on the sub-investment grade capital markets in Europe and the US. It is one of the largest collateralised loan obligation (CLO) managers in Europe, with €9 billion ($11.2 billion) under management. "This is a very safe, stable asset class. We are seeing unprecedented value in it. For the risk you are taking, you are being incredibly well paid," he notes.

Graham Rainbow, senior loan portfolio manager at Alcentra, agrees the asset class is a relatively safe bet. Investors have more security with these vehicles because if there is a problem with the underlying borrower and performance deteriorates, the impact is felt in the equity portion of a buyout or the structure that lends to the company. "So a decline in earnings does not actually impact the ability of the company to repay the loan back at par, which is ultimately all you are looking for," he explains.

"The second point is the security means you can actually go through the courts if there is significant underperformance and look to take control of the company, potentially selling it if the private equity owners don't put money in again. So you have protection through that security, protection through the fact that there is equity that sits below you in the structure and that's the piece that will perform worst if there is modest underperformance."

Hatfield notes there are significant differences between the US and European markets in this asset class. The US market, valued at around $1 trillion, is longer established than Europe and has more diversity of sectors. For example, says Hatfield, gaming, airlines and hotels are particularly strong.

"The European market isn't as large and established, with €200 billion outstanding. But now it is really coming of age. The European market is liquid, although not as liquid as the US. It gives investors a decent bid-offer spread and you can execute on trades," says Hatfield.

One of the most significant differences, however, is the fact that unlike the US, all European leveraged loans have a covenant attached. Hatfield believes there is more "discipline" in the European market, too.

"Europe is much more of a private equity market. Virtually all of the loans we are investing in are private equity sponsored leveraged buyouts or recaps." In the US the market is split equally between this type of deal and acquisition of finance or just straight leverage of the balance sheet for corporate purposes.

"The US market is a public market. Much more of it is publicly rated. People look at the rating agency's view of the company and buy and sell on that. We're seeing more differentiation in Europe now of pricing and structures related to the rating but it's still much more of a private market. While that might not appeal to some investors, it gives us a great deal of control over what happens," states Hatfield.

He adds, "We're getting monthly numbers as opposed to the quarterly ones in the US. We get a much more regular and detailed information flow which allows us to do much more monitoring and provides a better early warning system – another reason we think Europe is a safer place."

Both Hatfield and Graham discuss how leveraged loans are being exploited as an asset class by institutional investors as well as hedge funds. Hatfield gives his top picks by sector for 2012 and also discusses what impact macroeconomic factors have on the market, in particular the eurozone crisis.

Looking ahead, both are confident the asset class will further develop and will be considered mainstream by 2015.