Loan market splits: relationship lenders vs price-conscious hedgers

The draining of liquidity from the loan market is polarising banks according to their attitudes to borrowers. While the relationship factor has always been the big driver, yield is becoming much more important, especially for the investment banks that use credit default swaps to hedge their portfolios. They are reluctant to lend at margins below lenders’ CDS spreads, and are therefore simply saying no to deals.