The oversupply of fund money relative to the availability of paper in the loan market is more likely to benefit companies with rated loans than unrated ones, leading to cheaper borrowing costs. "Only companies with rated loans benefited from a downward flex in market pricing last year, while unrated loans were much more likely to have pricing flexed upwards at the expense of the company," noted Steven Bavaria, director of Standard & Poor's and head of its loan rating business. "Corporations with rated loans were able to save millions of dollars in interest costs last year, as they benefited from downward pricing using market flex pricing clauses," Bavaria stated. Not one unrated loan was flexed down last year, and 24% of unrated loans were flexed up.
Manitowoc's $475 million facility, Mediacom's $1.3 billion loan and Gray Communications $250 million bank deal are examples of rated loans getting the flex down treatment. One investor said, "I just don't see unrated loans. If you run a CLO you need to buy rated loans to satisfy the ratings agencies. They have created a business for themselves," she joked, adding, "if you buy an unrated loan, you will get hurt."
Having a loan rated removes a lot of the uncertainty on how the market will gauge a credit, Bavaria said. The market flex concept also enables banks to offer finer pricing to companies, as they know pricing can be increased if a market shock occurs, he added. Furthermore, most CLOs only look at rated loans, and if they do buy an unrated loan and have to get a shadow rating at a later date, they will buy at a higher spread, he added.
"Most investors are indifferent to a raise or lowering of the spread, they primarily want accuracy. They know there is no such thing as a free lunch," he commented.