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The Syndicated Loan Market - Definition and sizing - Market segments - Trends and issues. Meredith Coffey – mcoffey@lsta.org.

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the syndicated loan market definition and sizing market segments trends and issues

The Syndicated Loan Market- Definition and sizing - Market segments - Trends and issues

Meredith Coffey – mcoffey@lsta.org

The Loan Syndications and Trading Association is the trade association for the corporate loan market. The LSTA promotes a fair, orderly and efficient corporate loan market, and provides leadership in advancing the interest of all market participants. The LSTA undertakes a wide variety of activities to foster the development of policies and market practices designed to promote equitable marketplace principles and to encourage cooperation. The LSTA seeks to enhance public understanding of the corporate loan market and plays a pivotal role in monitoring and bringing consensus to the asset class.

u s corporate loan market is a vital source of capital for american business
U.S. Corporate loan market is a vital source Of capital for American business

U.S. Corporate loan and loan commitments outstanding

Commits/outstandings ($Bils.)

  • According to government data, the U.S. syndicated loan market totals nearly $2.8 trillion of committed lines and outstanding loans
  • It is a key source of financing for many large and middle market companies in the U.S.

Source: Shared National Credit Review

defining the u s syndicated loan market
Defining the U.S. syndicated loan market
  • SNC definition
    • Commercial & Industrial (C&I) loans
    • >= $20 million
    • >= 3 lenders
  • Syndicated
    • Loan originated by a lead bank
    • Can be underwritten or best efforts
    • Pieces of the loan sold to other bank and non-bank lenders (syndication)
  • Senior (investment grade and leveraged loans)
  • Secured (leveraged loans)
  • Key types
    • Term loan: Like a mortgage – drawn down once and repaid over time
    • Revolver: Like a credit card – drawn down, repaid, drawn down again
    • Letter of Credit: In effect, a guaranty by the lending group to repay debt or obligations if the borrower cannot
  • Pricing
    • Drawn is usually a “spread” in basis points over a base rate like LIBOR
    • Revolvers typically have a fee on undrawn portions as well
4 key u s large corporate loan market segments
Investment grade loan market

Loans to companies rated >= BBB-/Baa3 AND with a relatively low LIBOR spread

2007 lending: $658 billion

2008 lending: $319 billion

Leveraged loan market

Loans to companies rated < BBB-/Baa3 or unrated & with a high spread*

Divided into bank (pro rata) and non-bank segments

2007 lending : $689 billion

2008 lending : $294 billion

4 key U.S. large corporate loan market segments

Institutional loan market

  • Leveraged loans with non-bank lenders (such as mutual funds, CLOs, insurance companies, hedge funds, etc)
  • 2007 lending: $426 billion
  • 2008 lending: $69.6 billion

Secondary loan market

  • Market in which loans trade following the close of primary syndication
  • Most U.S. loan trading involves leveraged loans
  • 2007 trading: $442 billion
  • 2008 trading: $510 billion

*Traditionally LIB+150, increased to LIB+350 in 1Q09

Source: Reuters LPC for primary lending; LSTA for secondary trading

investment grade loan characteristics
Investment grade loan characteristics
  • Purpose: Often “backstops” commercial paper (CP)
    • CP is short-term (1-270 day) financing for working capital
    • If CP cannot be refinanced, company can draw on investment grade loan to repay CP
  • Structure
    • Usually undrawn revolvers
    • Combination of 364-day and multi-year revolvers
    • Senior, unsecured
    • Pari passu with senior, unsecured bonds
  • Pricing
    • Undrawn fee (usually facility fee or commitment fee)
    • Drawn margin (LIBOR spread + facility fee)
    • Spreads usually below that of bond market
    • Migration toward “Market-Based Pricing” – pricing based off CDS spreads
  • Lenders
    • Relationship banks
  • Rationale
    • Relationship loan
    • Positions bank to bid for other, more lucrative, business from the borrower
leveraged loan characteristics
Leveraged loan characteristics
  • Purpose: Often used for a corporate acquisitions or LBOs
  • Structure:
    • Revolver (purchased by banks) plus one or more term loans (purchased by banks and non-bank investors)
    • Usually senior and secured (above high yield bonds in capital structure)
    • Usually many restrictions, including maintenance financial covenants as well as affirmative and negative covenants
  • Pricing
    • Drawn margin has spread over LIBOR (generally at least 150 bps; currently far higher)
    • Revolver has a commitment fee (usually 37.5-50 bps) on undrawn portions
    • May be sold with an upfront fee or OID (Original Issue Discount)
    • May have a LIBOR floor
  • Lenders
    • Relationship banks (revolvers and possibly term loans)
    • Non-bank investors (term loans)
  • Rationale
    • Usually a relationship loan for banks
    • Stand-alone return for non-bank investors; usually weighed against HY bond returns
u s syndicated loan volumes
U.S. Syndicated loan volumes

Overall primary loan volume is down materially

At $764B, new loan volume in 2008 was at lowest level since 1994

Lending contracted further in 1Q09

U.S. syndicated lending volume

Loan volume ($Bils.)

Source: Thomson Reuters LPC

dislocation loan prices decline sharply defaults rise
Dislocation: Loan prices decline sharply, defaults rise

Leveraged loan default rate

U.S. non-bank loan bids

Average bid

Default rate (%)

Bid (% of par)

  • Loan prices come under considerable pressure
  • Phases of price changes:
    • 2007: Supply-demand imbalances
    • 2008: Deleveraging
    • 2009: Credit

Source: LSTA/LPC MTM Pricing, S&P LCD

leveraged loan prices fall secondary yields increase primary squeezed out
Leveraged loan prices fall, secondary yields increase, Primary squeezed out

Secondary loan yield (yield to 3 years)

Primary yields (higher rated loans)

LIB+(bps)

LIB+(bps)

  • Default rates have climbed, but currently are below peak of last cycle
  • Loan prices well below last downturn
  • Secondary spreads go into the thousands over LIBOR
  • Primary market cannot compete

Source: LSTA/LPC MTM Pricing, Standard & Poor’s LCD

investment grade loan spreads rise sharply
Investment grade loan spreads rise sharply

Spreads on BBB rated loans

Spread (bps)

  • Sample of loans contracted in 2009
  • Migration toward Market Based Pricing
  • Often spread cap of 250 bps/floor of 50 bps

Source: Thomson Reuters LPC

key issues in today s loan market
Key issues in today’s loan market
  • Lehman bankruptcy
    • Unsettled trades get stuck
    • LSTA helps unstick some trades before Lehman files
    • Lehman issue drives focus on improving settlement
  • Bankruptcy & DIPs
    • Roll-ups: Can create tiering among senior, secured lenders
    • CAM (Collateral Allocation Mechanism): Can create “overdelivering” in CDS auctions
  • CODI – Cancellation Of Debt Income
    • Initially treated as taxable income; sought and received legislative relief
    • Debt buybacks, exchanges now may result in rating agencies applying a Selective Default
    • LSTA helping to drive an industry solution
  • CLOs
    • What is the price demarcation between a “par” and “distressed” loan?
    • Debt buybacks and exchanges – impact on CLO defaults
    • Should CLOs be “TALF-able”?
    • LSTA provides a forum for analysis and consensus-building