New York, June 29, 2007 – Even as the market mulls a turn for the worse in the credit cycle, U.S. syndicated loan issuance for 2Q07 came in at $560 billion, the biggest quarterly volume on record, according to Reuters Loan Pricing Corporation. The record was reached in part due to another surge in LBO lending. Meanwhile, $55 billion of funds were raised in the U.S. high yield bond market during 2Q07, according to Reuters. But with the recent fall in loan prices, the restructuring of several financings and the postponement of the U.S. Foodservice LBO, the question at the end the quarter is clear – Is the bull market for loans over?

Leveraged loans – loans backing companies with a rating of less than BBB-/Baa3 and with a loan margin of at least 1.5% over LIBOR – came in at a record $215 billion. This came on the back of an unprecedented $65 billion raised just to finance LBOs. Combined with the $46 billion raised to back LBOs in 1Q07, LBO issuance for the first half of 2007 is just slightly under full 2006 LBO volume. And at an unprecedented $65 billion, 2Q07 U.S. LBO lending was equivalent to the fifth-largest year on record.

Again non-bank or institutional lenders (such as hedge funds, mutual funds and Collateralized Loan Obligations, or CLOs) played a central role in providing the bulk of the loans needed to finance these LBOs by buying $142 billion of overall leveraged loans.

But these impressive top-line figures belie a quarter that is ending with a cry for help. Vulnerability shown in other capital markets on the back of rising interest rates and sub-prime lender woes finally made its way into the loan market, thanks in part to the presence of a new loan credit default index – the LCDX index. Starting June 6, the LCDX index began to decline, tumbling 242 bps to 98.16 as through June 28. The timing could not have been worse given the forward calendar for leveraged loans was already above $200 billion.

And most of this debt was in the form of ‘covenant-lite’ loans, which require lenders to give up key controls – such as the amount of debt the company can carry on its balance sheet. In the last few weeks, appetite for these riskier deals nearly evaporated leaving banks in a scramble to get deals done. Loan investors forced a number of borrowers to raise interest rates or give back financial covenants, before agreeing to make space for them in their portfolio. And in the case of U.S. Foodservice, lenders have forced the company to postpone the entire financing, which in turn may have left the underwriters on the hook for the bridge financing.

So has the credit cycle turned? While recent leverage levels and deal structures have been worrying, defaults remain low. But the loan market has shown a new appreciation of risk and the resulting adjustment might not be over yet. This provides scant comfort to underwriters who have agreed to finance jumbo LBO deals, at terms that might not be realistic for the long summer months ahead.

Overall league tables

J.P. Morgan was the leading bank loan arranger in 1H07, with $293 billion and a 28% market share. Bank of America led $176.2 billion and racked up a 17% market share. Citigroup was third ($127.4 billion). Credit Suisse was fourth with $57.22 billion, followed by Deutsche Bank, which took in $49.99 billion.

Rank	Bank Holding Company	Volume	# of deals	Market Share
1	J.P. Morgan	$ 293,036,366,755	411	28%
2	Bank of America	176,213,275,000	391	17%
3	Citigroup	127,404,690,000	195	12%
4	Credit Suisse	57,221,694,700	126	6%
5	Deutsche Bank	49,992,229,031	80	5%
6	Wachovia Securities	48,661,199,550	162	5%
7	Goldman Sachs & Co	37,399,705,624	63	4%
8	Merrill Lynch & Co.	28,959,260,000	48	3%
9	Lehman Brothers	24,208,500,000	44	2%
10	UBS AG	20,831,753,419	58	2%

Leveraged Lending

J.P. Morgan led the charge with $108.2 billion and 22% market share. Bank of America took the second slot with $71.22 billion and 14% market share. The remaining top five slots were filled by Credit Suisse, Citigroup and Deutsche Bank.

Rank	Bank Holding Company	Volume	# of deals	Market Share
1	J.P. Morgan	$ 108,256,436,755	179	22%
2	Bank of America	71,221,995,000	187	14%
3	Credit Suisse	51,471,694,700	120	10%
4	Citigroup	46,439,110,000	82	9%
5	Deutsche Bank	37,952,229,031	66	8%
6	Goldman Sachs & Co.	32,322,205,624	60	6%
7	Merrill Lynch & Co.	27,094,260,000	45	5%
8	Wachovia Securities	19,178,743,000	81	4%
9	Lehman Brothers	18,571,000,000	40	4%
10	UBS AG	13,956,753,419	55	3%

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