Market players said the loan market has shown incredible flexibility this year adapting to the needs of issuers and the investors who are willing to provide that critical liquidity. In a panel discussion on liquidity and in remarks made later, bankers said with the commercial banks playing defense, the market had to find alternative sources of liquidity in hedge funds and other alternative investment players. "The loan market is always open," said Don Pollard, managing director and global head of the syndicated loan group at Credit Suisse First Boston. "Bank debt is an incredible product because of its flexibility."
By fulfilling the liquidity needs, investors were able to provide stability to the market that could have been stressed by credit crises. "Non-traditional loan investors such as hedge funds provided us the capability to solve some otherwise difficult corporate finance problems," noted Jonathan Calder, managing director and Citigroup's head of loan sales and trading.
To adapt to the needs of those willing to provide liquidity, arrangers structured and priced deals to appeal to a wider investor base. These deals more frequently incorporated the use of financing structures such as second-lien tranches, mezzanine-debt structures, and floating-rate notes, said one loan pro. Over the last year, the number of deals where these structures were used rose from two to 26.
These structures enticed new players and last year marked a growth in the depth and size of the loan market investor base. By the third quarter of 2003, 76% of participants in the loan market were non-bank players. Moreover, non-traditional loan investors, such as hedge funds, represented 40% of the investors in the deals priced at LIBOR plus 4% or higher. Deals such as Qwest Corp.'s $1.75 billion credit with a $1.25 billion floating-rate tranche and $500 million fixed-rate tranche, attracted more than 100 investors.
Market players said looking ahead it is expected that the health of commercial banks and growth of other institutional investors will over time supplant the non-traditional loan investors as the return prospects change. But one head of loans syndication noted that although some of the new investors have already moved on to other asset classes, others will stick around.