The hyper liquidity of the leveraged loan market has led to a decrease in credit quality with credits now coming to market that would not previously have stood a chance. "You can't dispute that quality of issuance is down. This has been the worst year on record for quality," said Martin Fridson, ceo of FridsonVision, speaking at a Standard & Poor's seminar on recovery ratings held last week in New York.
William Chew, managing director with S&P, said the ratings agency sees a tendency towards "credit amnesia" in terms of default and credit risk. "There are certainly deals coming to market that wouldn't have come in a different liquidity environment," concurred Henry Higbie, managing director and head of the ratings advisory team at J.P. Morgan. Investment bankers are calling marginal issuers that cannot get access to the market during other conditions, Fridson noted.
Payson Swaffield, v.p. and co-portfolio manager of Eaton Vance's bank loan funds, agrees that quality is down, but also believes advancements in the loan market may make the trend seem worse. The loan market now has data and more loans are rated. "Five years ago 60% of our portfolio was rated, now 80% is," Swaffield said. More credits that were not rated might have been at the lower end before, he noted.
"It would be foolish to say that we're not in an overheated market," said Anthony Clemente, a global partner and head of the senior secured loan group at INVESCO. But he believes the market will see continued liquidity due to more efficiency and better communication in the loan market. The Loan Syndications and Trading Association's CUSIP program and standardization of documentation will allow for more liquidity, he added.
What's Next
With so many refinancings this past year, the redux wave cannot continue to roll. Higbie believes the market will be driven by M&A volume. Clemente also believes M&A will increase and thinks there will be more global transactions, with credits syndicated in both Europe and the U.S. Swaffield also expects to see fewer refinancings and repricings and larger amounts of new issuance going forward. In addition, he expects to see more senior-secured floating-rate note structures.
The Banks Are Back
Banks, a huge source of liquidity, are seriously back into the market and are taking some paper away from the institutional market, Swaffield said. Banks are looking more as investors rather than from the relationship perspective, Clemente noted. This is evident by the fact that they are hiring managers rather than setting up branches, he added. Higbie believes the banks are back in for the long term. "Given the nature of the structure of banks... when they decide to go back into it, they're staying into it for a long time," he said.
