Frantic investor demand for assets has driven new issues to break at historical highs despite the general lack of call provisions in the loan asset class. New bank deals for NorthWestern Corp., Boise Cascade Corp., Dresser-Rand Co. and Lake Las Vegas Joint Venture broke in the 101-102 level or higher last week. "There is excess demand and not enough supply," a trader said. Hedge funds and collateralized loan obligations that are ramping up have excess cash they need to put to work and that is driving the hike. Banks are also putting money to work and the retail loan funds have seen massive inflows.
NorthWestern's $125 million "B" loan broke at 100 1/2-101 at the beginning of last week, while Boise's $1.33 billion "B" and $1.225 billion "C" loans allocated at 101 5/8-102 and 100 3/4-101 1/8, respectively. Meanwhile, Dresser's $300 million "B" broke around 102. Lake Las Vegas' $360 million first-lien loan broke at 101 1/2-101 3/4 and the $100 million second lien broke at 101 1/2-102 1/2, despite pricing being cut and a ratings downgrade during syndication (see story, page 3).
Some loan investors have questioned whether there are really two-sided markets at these levels. But traders countered that the issues are trading actively. Even if investors would not like to buy the paper at those levels as the payment of the premium dilutes the yield, the possibility of having the excess cash earning a larger LIBOR spread is better than nothing, said another trader. Also, the amount trading is not reflective of the whole issue, the trader noted. "You can say there's paper trading at 101 3/4, but maybe in a $500 million dollar issue... $20 million will trade so it's not really reflective of the entire issue trading that high," he commented.
