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Watermark

Will LCDS Lead To More Aggressive Underwriting?

28 Sep 2006

As new uses of loan-only credit default swaps continue to emerge, one area some market players are keeping an eye on is whether the product will allow--and encourage--banks to bid more aggressively for deals.

As new uses of loan-only credit default swaps continue to emerge, one area some market players are keeping an eye on is whether the product will allow--and encourage--banks to bid more aggressively for deals. Armed with the knowledge that they can more easily offload some of their risk, lenders may become more aggressive by lending more at cheaper rates, traders and investors said.

The thinking is that LCDS, still in the baby steps phase, should provide lenders with another outlet. Rather than turning to typical loan market players to offload the risk, they'll have better access to players on the CDS side, specifically hedge funds.

"If a bank knows of the ability to source synthetically and they think they have an advantage over other dealers, maybe they can bid more aggressively to lead deals because they know they have another outlet rather than selling loans [to offload some of the risk]," one LCDS dealer said.

The result could be tighter terms, lower pricing and typical loan investors getting edged out of some deals. A second LCDS trader said he does think it would affect pricing, but that this play will not be tested immediately. "You are not going to see a $10 billion LBO taken under totally by underwriters and sold totally with LCDS," he said. Another hitch, traders note, is that right now the syndicate desk that talks with the bankers and issuers does not have close contact with the trading desk to organize a commit-and-offload two step. A call to the Federal Reserve regarding potential credit risk was not returned by press time.

The one thing that seems certain is that LCDS will come into play when the large multi-billion dollar deals including Aramark, Michaels and HCA, come to market (CIN, 9/4). One banker predicted that in the next month another slew of multi-billion dollar deals will also become public, although he would not name names.

Michaels is expected to launch at a bank meeting next week; one investor expected Oct. 11. Last week Moody's Investors Service assigned ratings to the upcoming credit. It assigned a B2 rating to the $2.4 billion term loan; a B2 to $700 million of senior notes and a Caa1 to $700 million senior subordinated notes. Moody's did not rate the proposed $1 billion revolver. The financing backs the company's $6 billion leveraged buyout by The Blackstone Group and Bain Capital. The private equity groups won an auction for Michaels in July and turned to Deutsche Bank, Bank of America and Credit Suisse for the financing (7/10).

28 Sep 2006