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1Q08 U.S. Loan Market Review: Been Down So Long It Looks Like Up To Me
New York, March 28, 2008 – U.S. syndicated loan issuance registered a record first quarter decline as the credit crisis put the squeeze on new loan sales and leveraged buyouts, according to Reuters LPC. Syndicated loan issuance dropped by 55% in the first quarter to just under $166 billion versus almost $373 billion for the same period in 2007.
Not surprisingly, the riskiest parts of the loan market – loans purchased by institutional investors, such as collateralized loan obligations (CLOs) and loans funding LBOs – saw the greatest decline. U.S. leveraged loan issuance fell 74% in the first quarter versus last year, to $54.1 billion. Loans backing leveraged buyouts fell 88% to $5.4 billion. Institutional loans – loans sold to non-bank investors, such as CLOs, hedge funds and mutual funds – fell 91% to $12.4 billion. The drop in U.S. high yield bond issuance was not any less dramatic. Issuance during the quarter was only at $6.03 billion, a fall of 85% compared to the same time last year, according to Reuters Fixed Income Data/EJV.
This was a result of there being few buyers for loans. CLO issuance totaled less than $6 billion year-to-date, according to J.P. Morgan; loan mutual funds outflows approached $5 billion in January and February. Other buyers suffered forced unwinds, while hedge funds may continue to face margin calls. In addition, a declining LIBOR rate made loans less appealing to high yield investors. Banks also could not come to the rescue as they were absorbed by problems outside the loan space (CDOs and SIVs), by a backlog of unsold leveraged loans, and by the surprise draw-downs by Sprint Nextel and CIT Group.
The negative tone that gripped the market was clearly evident in the decline in average secondary prices for leveraged loans. These prices fell to 87 cents on the dollar in mid-February, from roughly 95 cents on the dollar in late December 2007. Prices have remained in the 88 cents to 89 cents range for the past month.
While a liquidity crunch, a wider market meltdown, a near bank failure, constricted balance sheets, capital worries and credit quality fears are grim enough news, there’s an inconvenient truth much closer to the loan market: As long as there’s too much supply of too-big LBO deals, the leveraged loan market cannot fully recover. Ironically, as long as the pipeline remains as large as it is, the actual volume of deals clearing the primary market may well remain small.
But that’s not all. The crisis that has gripped the market for leveraged loans is now beginning to emerge in the high-grade loan market. With balance sheets constricted, some banks are becoming hesitant to extend more credit to some high-grade borrowers. As the quarter progressed, the terms that even good relationship borrowers could lock in deteriorated.
As a result, banks opted in many cases for credit lines with shorter tenors. And as a result, the first quarter saw an increase in issuance of more capital-friendly 364-day high-grade credit lines versus deals with tenors of more than one year.
But the worries were just not limited to tenors. By March the tone in the market worsened. Spreads on the CDX investment grade CDS index gapped out amid fears of structured product unwinds. Banks that were already conserving capital saw their balance sheets tighten further. Unsurprisingly, high-grade issuance fell 26% to $69.6 billion. The latest high-grade hotspot is financial service companies. With the collapse of Bear Stearns and concerns about liquidity at CIT Group, lenders are increasingly nervous around financial companies that fund in the capital markets.
The good news is that default rates remain quiescent – at least for now. At 1.48%, Moody’s speculative grade default rates remain near cyclical lows, but other credit metrics are less benign. Charge-offs related to corporate and industrial loans nearly doubled between the third and fourth quarters (albeit to a still low 0.83%); the high yield distress ratio – which historically has predicted defaults – recently topped 22%; default rate forecasts have jumped.
League tables
| 1Q08 U.S. Lead Arranger |
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| Rank | Bank Holding Company | Volume | # of deals | Market Share |
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| 1 | J.P. Morgan | $45,374,250,000 | 93 | 27% |
| 2 | Bank of America | 32,378,150,000 | 134 | 20% |
| 3 | Citi | 27,257,300,000 | 47 | 16% |
| 4 | Wachovia Securities | 7,379,000,000 | 36 | 4% |
| 5 | RBofS | 5,682,750,000 | 15 | 3% |
| 6 | Wells Fargo & Co. | 4,350,895,595 | 33 | 3% |
| 7 | BNP Paribas | 3,420,375,000 | 11 | 2% |
| 8 | GE Capital Corp. | 3,151,150,000 | 32 | 2% |
| 9 | Lehman Brothers | 2,938,020,000 | 8 | 2% |
| 10 | RBC Capital Markets | 2,470,361,263 | 7 | 1% |
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| 1Q08 U.S. Leveraged Lead Arranger |
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| Rank | Bank Holding Company | Volume | # of deals | Market Share |
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| 1 | Bank of America | $11,403,800,000 | 69 | 21% |
| 2 | J.P. Morgan | 4,471,200,000 | 30 | 8% |
| 3 | Citi | 4,327,950,000 | 14 | 8% |
| 4 | Wachovia Securities | 3,421,500,000 | 20 | 6% |
| 5 | GE Capital Corp. | 3,151,150,000 | 32 | 6% |
| 6 | Lehman Brothers | 2,938,020,000 | 8 | 5% |
| 7 | BNP Paribas | 2,420,375,000 | 10 | 4% |
| 8 | Wells Fargo & Co. | 2,172,876,364 | 20 | 4% |
| 9 | RBC Capital Markets | 2,003,750,000 | 5 | 4% |
| 10 | RBofS | 1,327,750,000 | 6 | 2% |
Key market statistics
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| U.S. Total Issuance | 1Q07 Issuance ($Bils.) |
1Q08 Issuance ($Bils.) |
Percentage change (%) |
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| Overall*** | 372.8 | 165.95 | -55% |
| Investment Grade | 94.36 | 69.55 | -26% |
| Leveraged*** | 208.8 | 54.1 | -74% |
| Institutional*** | 145.2 | 12.4 | -91% |
| LBO* | 45.88 | 5.4 | -88% |
| HY bonds | 38.8 | 6 | -85% |
| U.S. New Money Issuance** | 1Q07 Issuance ($Bils.) |
1Q08 Issuance ($Bils.) |
Percentage change (%) |
| Overall (new money)*** | 192.68 | 84.99 | -56% |
| Invest. Grade (new money) | 29.224 | 22.68 | -22% |
| Leveraged (new money)*** | 126.5 | 41.17 | -67% |
| Institutional (new money)*** | 94.58 | 11.86 | -87% |
* Excludes bridge loans
**Includes only new financings, such as M&A, LBO, dividend payments, and incremental fund raising
*** Excludes secondary institutional sell-downs
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CONTACT: Meredith Coffey of Reuters LPC, +1- 646-223-7757/973-262-1913 or meredith.coffey@reuters.com