Loan managers are having a tough time staying invested as more investors and banks take a shine to loans and fewer deals come to market. Allocations across the board are shrinking as everyone piles into the few deals that are available. "No one is getting the allocation they want in most deals," said Michael Hatley, managing director of ING Capital Advisors. "The loan market is too hot. This has been going on since the spring, but has gotten worse as there is not enough paper to feed demand. It's been very hard to stay fully invested this year."
A shortage of paper is nothing new. But demand is surging as new collateralized loan obligations ramp up and retail funds are now back in the game. Exacerbating the situation, banks are getting more aggressive in demanding "B" loan allocations when they put in for the pro rata, said investors. All this comes as institutional term loan lenders need to reinvest the proceeds from a hot high-yield market that has resulted in bank market repayments, said Mark London, managing director and co-head of leveraged finance at ABN Amro. Investors cited DRS Technologies as an issuer that upsized a bond offering to take out bank debt last week.
Investors are becoming riled by an expanding invitation list. "What some find unfair, is that when you have an existing deal and there is an add-on or an acquisition, a bunch of new guys sometimes get invited," noted Hatley. "You had $25 million, but the arrangers have to accommodate all the new people and you're left with less." A different CLO manager asked why the banks would show a $150 million deal to 100 people. "People are falling over themselves on bad deals and structures," the manager added.
The obvious beneficiaries of the supply/demand imbalance are the issuers, who cannot seem to reprice their deals fast enough. Ball Corp. is said to be preparing to reprice its "B" loan to LIBOR plus 13 /4%, which would be one of the lowest levels ever in the institutional market. Investors also have made their frustrations known over Moore-Wallace (see related story, page 1). There could be an end in sight. "Pricing has to stabilize," said John Finan, managing director and head of loan syndications at ABN. "We cannot see continued pricing declines," he added. But ultimately, until deal flow picks up, loan investors will struggle to stay invested, he said. Hatley does see some positives though. "It seems there are more people discovering the loan asset class. It's good for liquidity, and it's been a great year for returns," Hatley noted.