New York, September 21, 2001 - As expected, last week's tragedy did affect the syndicated loan market. Not unusual in times of financial and political stress, the secondary loan market became more volatile and uncertain. However, the market reacted with great composure and restraint on the first normal day of trading. Furthermore, the volatility lessened on Tuesday and Wednesday, as buyers and sellers became more comfortable with the market and its prospects. There are several ways in which the increased volatility and subsequent stabilization can be seen.
Price Stability
To begin, on the Monday following the resumption of normal trading, the percentage of price decliners spiked upward, climbing from 3.81% of the roughly 1900 loans priced by The Loan Syndications and Trading Association (LSTA)/Loan Pricing Corp. (LPC) Mark-to-Market Pricing to nearly 23%. The markets stabilized Tuesday and Wednesday, when the percentage of price decliners fell to 19% and 12% respectively.
Loans are a relatively safe asset class: They are senior to other debt in the capital structure and generally are secured by collateral. As a result, the price declines were very moderate:
a) The average bid fell by 21 basis points (bps) between last week and this Monday
b) The average bid fell an additional 16 bps between Monday and Tuesday to 88.8, and an additional 10 bps between Tuesday and Wednesday.
c) This equates to a cumulative price decline of 0.55%
The median price - which reflects the mid-point of all of the 1900 loan prices in LSTA/LPC Mark-to-Market Pricing - remains considerably higher at 97.44% of par. This has dropped only slightly from 97.75 before the attack.
Liquidity
Unsurprisingly, the market grew somewhat less efficient following the attack, as market makers were less certain about the market and economic climate. As a result, the bid-ask spread widened. (The bid-ask spread is the distance between the price that which a trader is willing to pay for a loan and the price at which he/she is willing to sell the loan, and is considered a measure of market efficiency.)
a) The bid-ask spread widened by 5% when normal trading resumed Monday
b) On Tuesday and Wednesday, it continued to widen, but in decreasing increments. Tuesday and Wednesday's bid-ask spread widened by 2% and 1% respectively.
Overall, the pattern of activity in the secondary market suggested that the market reacted to last week's events on Monday by:
a) Reducing the prices on many loans
b) Reducing the average price in the market
c) Widening the bid-ask spread
These changes were muted relative to other markets. The secondary loan market began stabilizing Tuesday and stabilized further on Wednesday.
Anecdotally, the calm in the secondary market has buoyed the primary market. While there was few bank meetings this week (and the ones that did occur were via telephone), syndicators are beginning to schedule bank meetings for next week. There have been few signs of pricing pressures from the loan market: Institutional investors have said that they are continuing to buy loan assets, and several loans were closed without increasing spreads to clear market.
About The Loan Syndications and Trading Association:
Founded in 1995, The Loan Syndications and Trading Association (the LSTA) is a not-for-profit trade association committed to the orderly development of a fair, efficient and professional trading market for commercial loans. The LSTA was formed in response to exponential growth in loan trading volume in the secondary debt market. The LSTA's mission has grown to include the full scope of issues relating to syndicated lending and loan trading. Leaders from throughout the industry comprise the bulk of LSTA's membership. Through the Association and its activities, the membership takes an active role in identifying and addressing key industry issues that ultimately lead to establishing standard market practices and procedures. For more information, visit www.lsta.org.