The Syndicated Loan Market - Who is the LSTA (and what is our focus)? - - PowerPoint PPT Presentation

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The Syndicated Loan Market - Who is the LSTA (and what is our focus)? - - PowerPoint PPT Presentation

Jun 04, 2023 34 likes •248 views

The Syndicated Loan Market - Who is the LSTA (and what is our focus)? - Description of loan market (size, segments, lender constituency) - Secondary market (and what it shows) - Pressures in the loan market (and for borrowers) Bram Smith

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The Syndicated Loan Market

  • Who is the LSTA (and what is our focus)?
  • Description of loan market (size, segments, lender constituency)
  • Secondary market (and what it shows)
  • Pressures in the loan market (and for borrowers)

Bram Smith – bsmith@lsta.org (Interim Executive Director) Elliot Ganz – eganz@lsta.org (General Counsel) Meredith Coffey – mcoffey@lsta.org (SVP – Research)

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Who is the LSTA?

The Loan Syndications and Trading Association is the trade association for the floating rate corporate loan market. The LSTA promotes a fair, orderly, and efficient corporate loan market and provides leadership in advancing the interest

  • f all market participants. The LSTA undertakes a wide variety of activities to foster the development of policies and

market practices designed to promote just and equitable marketplace principles and to encourage cooperation and coordination with firms facilitating transactions in loans and related claims. The LSTA seeks to enhance public understanding of the corporate loan market and to serve the public interest by encouraging adherence to high ethical standards by all market participants. The LSTA plays a pivotal role in monitoring and bringing consensus to this important asset class by acting as a forum for the analysis and discussion of issues and developments relating to the loan market and advocating the shared interests of its membership. The Association formulates policy through its Board of Directors after consensus is developed through the active involvement of individual

  • fficers and employees of Member firms.

The LSTA stands out among financial market trade associations because it represents all segments of the market it serves: primary sales; par/near par and distressed trading; and bank and non-bank portfolio management. The LSTA membership totals more than 280 institutions.

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U.S. Corporate loan market is a vital source Of capital for American business

500 1000 1500 2000 2500 3000 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Total Outstanding Total Committed

  • 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.

U.S. Corporate loan and loan commitments outstanding

Commits/outstandings ($Bils.)

Source: Shared National Credit Review

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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

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

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

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

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U.S. Syndicated loan volumes

200 400 600 800 1000 1200 1400 1600 1800 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 LTM 1Q09

Other ($Bils.) IG ($Bils.)

  • Lev. ($Bils.)
  • Overall primary loan volume is down materially
  • At $764B, new loan volume in 2008 is at lowest level since 1994
  • At $104B, 1Q09 loan issuance is down 41% from 1Q08

Loan volume ($Bils.) Source: Thomson Reuters LPC

U.S. syndicated lending volume

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Non-bank term loan outstandings

580.3 596.1 13.6 34.7 148.0 192.7 132.5 247.8 73.3 101.1 129.9 117.3 399.7 556.8 $0B $100B $200B $300B $400B $500B $600B $700B YE1996 YE1997 YE1998 YE1999 YE2000 YE2001 YE2002 YE2003 YE2004 YE2005 YE2006 YE2007 YE2008 2/6/2009 As of

Non-bank term loan outstandings by year

Outstandings ($Bils.) Source: S&P/LCD

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Pressures on the secondary

  • 2007: Supply-demand imbalance
  • 2008: Deleveraging
  • 2009: Credit?
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Dislocation: Loan prices decline sharply in 2008

Bid (% of par) Source: LSTA/LPC MTM Pricing

  • Loan prices come under considerable pressure in past 18 months
  • This unusual behavior has impacted leveraged companies’ ability to access financing

U.S. non-bank loan bids

60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 100 102 6/19/02 1/10/03 8/1/03 2/24/04 9/14/04 4/7/05 11/10/05 6/5/06 12/21/06 7/13/07 2/1/08 8/21/08 3/13/09

Average bid Median bid

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Loan trading activity high; more loans trade < 80

20 40 60 80 100 120 140 160 180 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 "Distressed" < 80 Par >= 80

  • Trading activity remained relatively robust in 4Q08
  • More loans are trading < 80 cents on the dollar, which was typically considered “distressed”
  • However, there is an increasing disconnect between price and credit quality

Trading volume ($Bils.)

Trading volume

Source: LSTA trade data study

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Prices have declined even for companies With high ratings and no downgrades

10 20 30 40 50 60 70 80 90 100 BBB- BBB BB+ BB BB- B+ B B- CCC+ CCC CCC- D 4Q07 4Q08

Trade prices by rating category (4Q07 vs. 4Q08)

% of trading sample

  • Even higher rated companies are trading at levels previously considered distressed
  • Typical trade price of BBB- names declined from 97.87 in 4Q07 to 85.15 in 4Q08
  • Typical trade price of BB+ rated names declined from 97.7 in 4Q07 to 80.09 in 4Q08

Source: LSTA trade data study

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Default rates are climbing

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

0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 12/31/98 6/30/99 12/31/99 6/30/00 12/31/00 6/30/01 12/31/01 6/30/02 12/31/02 6/30/03 12/31/03 6/30/04 12/31/04 6/30/05 12/31/05 6/30/06 12/31/06 6/30/07 12/31/07 6/30/08 12/31/08 LTM $Defaults / Outstanding-12 months LTM # of Issuers in default / Total Issuers-12 months

Leveraged loan default rate

Default rate (%)

  • Initially defaults were defined by small companies
  • Defaults becoming materially larger
  • “Shadow” default rate higher – above 9%
  • Amendments are becoming more difficult
  • Loss given default could worsen
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Impact on borrowers

  • Pressures
  • Deleveraging
  • Defaults
  • Consolidation
  • Liquidity
  • Impact
  • New issue yields
  • Amendments
  • Refinancing cliff
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Bank consolidation impacts liquidity

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14 Number of investor groups that made 10 or more primary commitments each year 22 29 48 54 42 98 116 168 218 261 85 76 64 150 300

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

*With the slow down in deal number, for the latest period LCD uses $100M of estimated allocations as a cut-off

Buyside is less active in 2008 – and may contract in 2009

Source: Standard and Poor’s LCD # of active investors

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

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

Secondary loan yield (yield to 3 years)

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

400 800 1200 1600 2000 2400 2800 3200 Jan-99 Jul-99 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 BB rated loans B rated loans 400 800 1200 1600 2000 2400 2800 3200 1Q98 5/1/1999 1/1/2000 9/1/2000 5/1/2001 1/1/2002 9/1/2002 5/1/2003 1/1/2004 9/1/2004 5/1/2005 1/1/2006 9/1/2006 5/1/2007 1/1/2008 9/1/2008

40 80 120 160 20 240 280 320

Precision Drilling TNS Level 3

Primary yields (higher rated loans)

LIB+(bps)

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5 10 15 20 25 30 35 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09

Constraints: Companies need amendments And have to pay up

Source: S&P/LCD

Margin increase on amended loans Count

  • As the economic environment weakens, more companies are seeking amendments or covenant

waivers for their loans

  • 48 covenant amendments tracked in Jan/Feb; annualizes to nearly 300 – and pace may quicken
  • With low secondary prices, reduced lender liquidity and different lenders, amendments are more

expensive

* The data above comprises publicly available covenant amendment information tracked by a loan information company (S&P/LCD). It does not include information that has not been made public.

0 bp 50 bp 100 bp 150 bp 200 bp 250 bp 300 bp Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09

Count of amendments w/fees

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CLO issuance buoys institutional loan growth Both markets stop in 2008

50 100 150 200 250 300 350 400 450 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 10 20 30 40 50 60 70 80 90 Total issuance (incl refis, repricings) CLO issuance Inst issuance ($Bils.) Source: Thomson Reuters LPC, Intex, Wachovia

Institutional loan issuance

  • Institutional market growth enabled by CLO growth
  • Severe dislocation in CLOs and institutional loan market in 2008
  • CLO issuance stops
  • Ability to issue new loans ends
  • This is not simply an institutional problem
  • These loans need to be refinanced – and this is a Corporate America problem

CLO issuance ($Bils.)

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The 2005-2007 bulge of leveraged loans will mature… And will need to be refinanced

50 100 150 200 250 2009 2010 2011 2012 2013 2014 2015 2016 TL RC mats 50 100 150 200 250 2009 2010 2011 2012 2013 2014 2015 TL mats RC mats

Scheduled maturity profile Expected refinancing profile

  • Issuance boom from 2005-2007 will mature in 2011-2014
  • However, loans will need to be refinanced a year earlier (2010-2013)
  • Revolvers will create nearer term refinancing pressure

Volume of loans ($Bils.) Volume of loans ($Bils.) Source: LSTA,S&P/LCD, Intex, Wachovia

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CLO reinvestment period will end, Reducing demand as loan maturities hit

  • 300
  • 200
  • 100

100 200 300 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Cumulative decrease in demand as reinvestment period ends Cumulative CLO outstandings

  • CLO issuance peaked in 2007 (Outstandings in red)
  • CLO reinvestment periods range 5-7 years (Blue reflects “frozen” amt of CLOs as reinvestment ends)
  • As reinvestment periods end, CLOs will no longer be able to buy new loans
  • In turn, “re-investible” dollars will decline
  • Blue line reflects MAXIMUM “reinvestible” CLO dollars – eg, if all loans in CLOs are repaid
  • In reality, reinvestible dollars will be much lower (dotted lines)

Volume ($Bils.)

CLO issuance vs. CLOs going static Theoretical CLO reinvestment capacity

Volume ($Bils.)

50 100 150 200 250 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Max reinvestible $ 75% max reinvestible 50% max reinvestible 25% max reinvestible 10% max reinvestible

Source: LSTA,S&P/LCD, Intex, Wachovia

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There may be a significant refinancing shortfall

  • 50

100 150 200 250 2009 2010 2011 2012 2013 2014 Index TL expected refi date CLO demand - assumes 25% max reinvestible CLO demand - assumes 50% max reinvestible

Volume ($Bils.)

  • Starting in 2011, there will be a large volume of loans that must be refinanced
  • Because CLOs will be entering the end of their reinvestment periods, they will not be able to refinance

these maturing loans

  • This is probably an unrealistic best case scenario

Source: S&P/LCD, Wachovia Securities, LSTA

TL refinancing profile vs. possible CLO demand

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How to address refinancing cliff?

50 100 150 200 250 2009 2010 2011 2012 2013 2014 2015 Total Less Defaulted Loans Less Defaulted and CCC Loans Less Defaulted, CCC and B- Loans

Expected refinancing schedule

  • Issuance boom from 2005-2007 will mature in 2011-2014
  • However, loans will need to be refinanced a year earlier (2010-2013)
  • Avg. Inst loan issuance

1998-2005

Volume of loans ($Bils.)