New York, June 27, 2008 – While the economy technically might not be in recession, syndicated lending certainly was in one during the second quarter of 2008, according to Reuters LPC. Syndicated loan issuance dropped by 61% in the second quarter to just under $230 billion versus almost $582 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 62% in the second quarter versus last year, to $84.1 billion. Loans backing leveraged buyouts fell 86% to $7.9 billion. Institutional loans – loans sold to non-bank investors, such as CLOs, hedge funds and mutual funds – also fell 86% to $20 billion. The drop in U.S. high yield bond issuance was not any less dramatic. Issuance during the quarter was only at $33.8 billion, a fall of 38% compared to the same time last year, according to Reuters Fixed Income Data/EJV.

All told, merger financings just topped $50 billion, down 60% from 2Q07. Unsurprisingly, there was a shift from LBO financings to financing corporate mergers. At $22 billion, investment grade merger financing held up reasonably well as investment-grade borrowers exploited the evaporation of LBOs.

During the first quarter, the investment grade loan market was, if not unscathed, relatively little-scathed. Not so during the second quarter: investment grade loan issuance plunged 66% relative to the year-earlier levels as refinancings evaporated and that burgeoning M&A couldn’t fill the gap.

The drop in lending comes not as a surprise given the constriction banks continue to face on their balance sheets.

In addition, the negative tone that gripped the market since the beginning of the credit crunch a year ago remains evident in the decline in average secondary prices for leveraged loans. These prices fell to nearly 85 cents on the dollar in mid-February, from roughly 95 cents on the dollar in late December 2007. Prices now appear to have stabilized, but they remain in the 88 cents to 89 cents range.

To a degree, bankers attribute the slight recovery and stability in leveraged loan prices to the reduction in supply of ‘hung’ LBO loan. Though totally below the radar, bankers spoke of more and more opportunity funds buying up loans through special programs. In early April, Citigroup sold $12 billion of unsold LBO loans back to funds owned by private equity investors, and shortly thereafter Deutsche Bank offloaded some $5 billion of assets as well. All told, bankers (and Reuters LPC) estimate that more than $16 billion of specific hung 2007 deals were quietly sold. Perhaps the only big truly stuck deal is the loan for Chrysler Car Corp. As bankers sensed the overhang receding, the markets became increasingly buoyant.

But it can be hard to distinguish between buoyancy and bipolar disorder. The market rose as the overhang was reduced and it seemed the LBO financing for Clear Channel would go away. But then as it became clear that Clear Channel deal would stay, the market again retreated. And then there is the $23 billion loan BCE Inc. plans to sell to back its LBO.

So the leveraged loan market bifurcated – and stabilized. The investment grade loan market shrank to a shadow of its former self, but few bankers think there is an Enron or WorldCom type disaster on the horizon. So is the loan market going to simply be a dull, pallid version of itself for the next year? On the surface, the answer seems to be yes.

But when pressed, nearly every lender identified oil prices, write-downs at banks, the deteriorating economy and defaults as the biggest threat in the loan market today.

League tables

Rank	Bank Holding Company	Volume	# of deals	Market Share
1	J.P. Morgan	82,494,953,616	144	36%
2	Bank of America	39,367,950,000	145	17%
3	Citi	30,885,000,000	28	13%
4	Wells Fargo & Co.	7,477,253,984	36	3%
5	Wachovia Securities	7,416,600,000	39	3%
6	BNP Paribas	5,317,500,000	14	2%
7	UBS AG	4,792,500,000	6	2%
8	Barclays Bank Plc	4,355,500,000	9	2%
9	Credit Suisse	4,275,000,000	10	2%
10	Goldman Sachs	4,182,500,000	6	2%

.

Rank	Bank Holding Company	Volume	# of deals	Market Share
1	J.P. Morgan	21,358,500,000	61	25%
2	Bank of America	18,689,250,000	80	22%
3	Wachovia Securities	4,664,050,000	25	6%
4	Credit Suisse	4,275,000,000	10	5%
5	Goldman Sachs	3,197,500,000	5	4%
6	GE Capital Corp.	3,000,100,000	27	4%
7	Wells Fargo & Co.	2,860,000,000	20	3%
8	Citi	2,720,000,000	3	3%
9	BNP Paribas	2,620,000,000	8	3%
10	Barclays Bank Plc	2,222,500,000	4	3%

U.S. Total Issuance	2Q07 Issuance ($Bils.)	2Q08 Issuance ($Bils.)	Percentage change (%)
Overall***	581.8	229.6	-61%
Investment Grade	255.7	87.6	-66%
Leveraged***	219	84.1	-62%
Institutional***	143.4	20	-86%
LBO*	57.7	7.9	-86%
HY bonds	53	33.8	-38
U.S. New Money Issuance**	2Q07 Issuance ($Bils.)	2Q08 Issuance ($Bils.)	Percentage change (%)
Overall (new money)***	261.2	108.7	-58%
Invest. Grade (new money)	78.2	32.8	-58%
Leveraged (new money)***	139.9	46.1	-67%
Institutional (new money)***	100.6	13.4	-87%

* Excludes bridge loans
**Includes only new financings, such as M&A, LBO, dividend payments, and incremental fund raising
*** Excludes secondary institutional sell-downs

* 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@thomsonreuters.com

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