Loan pricing will continue to decline with the demand for loans remaining strong and new issuance at record levels, according to panelists discussing the state of leveraged loan market at the Loan Syndications and Trading Association's annual conference in New York last week. The average spread on institutional B+/B loans was down 170 basis points to LIBOR plus 255 basis points from March 2003 to October 2005. Likewise, the average spread on institutional BB/BB- loans was LIBOR plus 170 basis points in October 2005, compared with LIBOR plus 425 basis points in November 2001. "This is the golden age for borrowing for folks around the country," said Mark Boyadjian, senior v.p of Franklin Templeton Investments.
Boyadjian said he expects loan repricing to continue and that he would like to see more emphasis on pre-payment options. Fellow panelist Jack Yang, partner of Highland Capital Management, predicted that at some point probably within the next six months -- the market will demand call protection.
Tight pricing is already starting to pinch collateralized loan obligations. Kevin Petrovcik, managing director of Invesco, warned that the CLO market, which represents three-quarters of the leveraged loan market, cannot withstand lower pricing.
Payson Swaffield, v.p. and portfolio manager of Eaton Vance Management, agreed. "Those vehicles require certain spread tests as well as quality tests," he said. "I don't think [that part of the market] can withstand much lower pricing."
The panelists also pointed out hedge funds have had an important effect on loan liquidity. Swaffield said hedge funds have played an important role in boosting loan liquidity, especially in the distressed loan market. An area that hedge funds have been particularly active in is the second-lien loan market. The volume and number of second-lien loans set new records in 2005. As of October 2005, second lien loan volume reached $13.7 billion, compared with $11.9 billion in 2004 and $65 million in 2001. Spreads have also continued to fall in the second-lien loan market. The average spread on second-lien term loans was LIBOR plus 617 basis points in the third quarter of 2005, compared with LIBOR plus 738 basis points in 2003.
