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

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The Syndicated Loan Market - Definition and
sizing - Market segments - Trends and issues
Meredith Coffey mcoffey_at_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.
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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
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Defining the U.S. syndicated loan market

• SNC definition
• Commercial Industrial (CI) loans
• gt 20 million
• gt 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

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4 key U.S. large corporate loan market segments

• Investment grade loan market
• Loans to companies rated gt BBB-/Baa3 AND with a
  relatively low LIBOR spread
• 2007 lending 658 billion
• 2008 lending 319 billion

• Leveraged loan market
• Loans to companies rated lt 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

• 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 LIB150, increased to LIB350 in
1Q09
Source Reuters LPC for primary lending LSTA for
secondary trading
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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

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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

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U.S. Syndicated loan volumes
U.S. syndicated lending volume
Loan volume (Bils.)

• 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

Source Thomson Reuters LPC
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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, SP LCD
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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 Poors
LCD
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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
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Key issues in todays 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