The run-up in secondary prices was put under the microscope as leveraged loan pros looked for reasons and tried to determine whether the valuations are justified. "The market is out of whack," said Pete Vaky, managing director and head of loan syndications at SunTrust Bank, explaining that the demand for loan paper currently exceeds supply. This increased demand is coming from a number of new entrants into the loan market, including new collateralized loan obligations as well as hedge fund participation. Speaking to the growth in the distressed market, Nancy Wilson Brothers, a member of Morgan Stanley's distressed loan and bond sales effort said, "Everyone is getting involved whether they're ready or not."
On the supply side of the equation, new issuance in the primary market has not been sufficient to deal with the demand for paper and in some cases investors have had to look at loans that they would not have necessarily given a second glance under different circumstances, participants said. New issue has to come from increased merger and acquisition activity, noted Vaky. Contributing to the lack of supply is less pressure on banks to sell pieces of their exposure, noted Brothers.
Participants discussed whether the prices for loans are surging due to fundamentals or due to froth. Vaky conceded that the market may be frothy, but believed that to some extent the fundamentals are there to support the current levels. Moreover, Brothers said conditions have been improving, noting that many companies are starting to come out of bankruptcy. In addition, problems such as asbestos liabilities that have plagued the market since 1998 are being resolved. "The dirty laundry appears to be washed out," she said.