New York, June 26, 2009 (Thomson Reuters LPC) – Six months ago, the loan market appeared to be on the edge of a precipice. Six months later, the loan market is hoping that the recent semblance of stability seen in other capital markets and the wider economy will continue. While the global economy remains in recession, recent data shows the worst might be behind us. Signs of stability in the financial system have been reflected in the easing counterparty risk levels last seen before the collapse of Lehman Brothers. But these figures should not mask the fact that amidst the recession, defaults continue to escalate. Moody’s Investors Service reported that the U.S. speculative-grade corporate default rate rose to 10.2% in May, up from 9.3% in April and much higher than the 2.2% a year ago. In the U.S., there were 22 defaults in May, bringing the total U.S. figure to 107 this year, way above last year’s total of 79 U.S. defaults. But default forecasts do get adjusted and even here is some good news: Moody’s expects defaults to peak at 13.5% in November, down from an earlier forecast of 14.5%.

With these signs of stability, in 2Q09 the oversold credit markets experienced a rally that touched not just the already robust high-grade bond market, but spread into high yield bonds and leveraged loans. Despite the easing in bid levels during the last few days, high-grade bond bids moved up during 2Q09 by more than 8.7 points to settle at 98.2. Meanwhile, high yield bonds saw a run-up with bids reaching a high of 79.2 before settling at 77.6. And in the leveraged loan market, the SMi100 (the 100 most widely held loans) rose by nearly 15 points to settle around 86.

The contraction subsides
The rally in the secondary market has not led to drastic changes to the lending landscape. Loan issuance remains at historic lows, though there is now a reprieve from market contraction. Overall U.S. syndicated loan issuance for 2Q09 came in at around $156 billion, 37% off for the same period last year. Similarly, issuance for 1H09 stands at around $269 billion, also down 37%. But thanks to a jump of nearly 117% in leveraged loan issuance from the first quarter, second quarter loan issuance has increased by nearly 37% from 1Q09.

This uptick in leveraged loan issuance would not have been possible if not for the high yield bond market. All together, issuance in the bond market for 2Q09 and 1H09 came in at $46.4 billion and $57.2 billion, respectively. Of this, nearly $32 billion was used to pay off leveraged loans. The repayment of many leveraged loans, in turn, put money back into the hands of loan investors, especially hard-pressed CLO managers.

The rally in better-rated leveraged loans and the availability of cash in investor hands meant money could be put to work on opportunities in the secondary market or in new, highly priced, deals. But new money deals were few and far between. LBOs, which have historically provided the bulk of new money in the leveraged loan space, were notable for their absence. LBO loan issuance for 2Q09 came in at just $590 million, a drop of 95% for the same time period last year. The “new money” issuance that replaced LBOs were the multiple amend & extend deals, where select quality credits extended portions of their institutional term loans into new tranches that offered higher spreads and in turn provided the issuer with relief from near-term maturities. But bankers warn that if the rally in secondary market subsides and the high yield market reverses its gains, this window for leveraged loan issuers can shut down. Amend & extend deals have provided relief to only a select group of names and do not in any serious way deal with the refinancing cliff. Barring amortization payments, there are more than $350 billion in leveraged loans maturing in the next three years.

M&A is MIA in high-grade
Investment grade lending in 2Q09 reached $70 billion, down 27% for the same time period last year. 2Q09 is usually when companies come back to extend their revolvers, but this year many companies left facilities alone rather than risk having to reduce them in a renewal. What was even more remarkable was that bridge loan issuance, as a part of overall investment grade lending, came in at only 9%; the same figure for the preceding quarter was at 54%.

The lack of M&A financing in the investment grade space was glaring so soon after the market cleared jumbo deals, such as Pfizer’s $22.5 billion loan during 1Q09. But even as borrowers do not feel confident enough to do jumbo M&A deals, lenders feel they can get done. Issuance in the high-grade bond space came in at $186.7 billion for 2Q09 and a sizable portion of that has been used to take out the jumbo investment grade bridge deals from last quarter. Lenders see this as a sign of more capacity for bridge loans and argue that that the absence of large financings does not reflect a frozen bank market. The loan market still has a long way to go before it can get any close to the volumes seen during the last few years. But at least now even if the market is not deteriorating at the same pace as it had a few months ago.

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Key market statistics

U.S. Total Issuance	2Q08 Issuance ($Bils.)	2Q09 Issuance ($Bils.)	Percentage change (%)
Overall***	248.17	155.81	-37%
Investment Grade	95.24	69.66	-27%
Leveraged***	91.61	68.43	-25%
Institutional***	20.32	13.92	-32%
LBO*	10.79	0.59	-94%
HY Bonds	33.34	46.43	39.20%
I-Grade Bonds	297.6	186.7	-37.3%
U.S. New Money Issuance**	2Q08 Issuance ($Bils.)	2Q09 Issuance ($Bils.)	Percentage change (%)
Overall (new money)***	114.68	35.84	-69%
I-Grade (new money)	36.5	15.47	-58%
Leveraged (new money)***	47.06	12.41	-74%
Institutional (new money)***	12.49	3.85	-69%

League tables

Rank	Bank Holding Company	Volume	# of deals	Market Share
1	J.P. Morgan	51,645,768,903	89	33%
2	BofA/Merrill Lynch	30,928,238,527	116	20%
3	Citi	16,657,912,629	36	11%
4	Wells Fargo & Co.	12,531,593,960	71	8%
5	BNP Paribas SA	5,446,768,333	22	3%
6	Credit Suisse	3,855,776,384	10	2%
7	RBC Capital	3,579,598,526	5	2%
8	PNC Bank	3,284,609,936	42	2%
9	Barclays Bank	3,005,675,449	11	2%
10	RBS	2,815,582,821	15	2%

Rank	Bank Holding Company	Volume	# of deals	Market Share
1	BofA/Merrill Lynch	13,875,855,193	79	20%
2	J.P. Morgan	13,027,935,569	41	19%
3	Wells Fargo & Co.	9,528,260,627	52	14%
4	Citi	6,197,515,192	17	9%
5	BNP Paribas SA	4,267,640,000	17	6%
6	RBC Capital	2,769,598,526	3	4%
7	Credit Suisse	2,547,443,051	8	4%
8	Deutsche Bank	1,918,165,192	6	3%
9	GECC	1,906,668,333	18	3%
10	BMO Capital	1,676,666,667	8	2%

* 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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