Pro rata loans are way up for the quarter, with about $2.4 billion replacing institutional facilities through the middle of July, according to data compiled by Standard & Poor's. For the same quarter last year, there was only $500 million. The increased bank appetite has seen some "B" allocations rolled into "A" loans, decreasing paper for investors.
"You're seeing more "A" loans," said one portfolio manager. He explained that in general banks are committing to more revolvers and more term loans. The trend is hurting the buyside because of the shrinking paper supply. A banker agreed that right now, especially when there is more demand than supply, the banks' appetite eliminates investing opportunities for buysiders. He explained pro rata is really just a function of bank appetite and that appetite has increased over the last year.
The investor said credits that were BB or BB- that were being priced at LIBOR plus 1 3/4% or even lower, were the ones turning to the pro rata structure. According to S&P, in the second quarter of 2005, 82% of the volume of deals that replaced institutional facilities with new pro rata money were rated BB+/BB/BB-, 16% were not rated and 2% were rated B+/B/B-.
In data tracked since the fourth quarter of 2003, pro rata volume has spiked the most during the third quarter of 2004 and then again in the first quarter of 2005, with $3.5 billion.
Some of the most recent deals include a $700 million for Cumulus Media, a refinancing led by JPMorgan and Bank of America, a $1billion deal for Silgan Holdings led by Deutsche Bank and Banc of America Securities, a $1.1 billion deal for Triad Hospitals and a $1 billion JPMorgan and Wachovia-led deal for Freedom Communications.