New York, September 28, 2007 – Amidst a credit crunch in the sub-prime market the U.S. loan market was caught in a state of technical imbalance during 3Q07. Despite the absence of defaults, the market suffered its sharpest drop during 3Q07 as overall syndicated loan issuance fell 36% from the previous quarter to $373 billion, according to Reuters LPC.

A more spectacular drop in volume was seen in leveraged loans – loans backing riskier borrowers with a rating of less than BBB-/Baa3 and with a loan margin of at least 1.5% over LIBOR – which plummeted 46% from 2Q07 levels to $119 billion. This drop in leveraged loan issuance took a bite off loans backing LBOs with the final 3Q07 tally coming in at $52.6 billion, a drop of nearly 17% from the preceding quarter’s record issuance of $63 billion.

The crunch took the wind out of loan demand from non-bank or institutional lenders (such as hedge funds, mutual funds and Collateralized Loan Obligations, or CLOs). These investors have played a central role in providing the bulk of the loans needed to finance LBOs, but during 3Q07 loan investors purchased only $66 billion in loan assets, a drop of 55% from 2Q07. New issuance in the U.S. high yield bond market also fell over the last quarter by a spectacular 79% to just $11.5 billion, according to Reuters.

These sharp declines were mainly due to the sub-prime contagion that – perhaps inappropriately – spread into the traditionally stable loan market. One reason this contagion could spread to loans was to the introduction of a new loan credit default index – the LCDX index. Starting June 6, the LCDX index began to decline, tumbling by nearly 840 bps to 92.11 through July 27. The shockwaves of the LCDX crash swept quickly into the cash loan market as loan prices began to decline. To make matters worse the collapse of the sub-prime market burnt hedge funds who were also major backers of the biggest bloc of leverage loan buyers – CLOs. As cost of funding CLOs spiked, along with falling loan prices, the market seemed caught in a downward spiral. The timing could not have been worse given the forward calendar for leveraged loans was already above $200 billion, thanks to jumbo LBOs. Many of these deals were structured for a “pre-crunch” market and lacked key lender protections such as covenants. Appetite for these deals evaporated forcing underwriters to postpone nearly $35 billion in loan sales, including a $12 billion loan backing the LBO of Chryslers’ auto business.

Loans could still be sold in this new environment, but only at a price that was too dear for both the private equity investors purchasing the borrower and the underwriters who had agreed to finance that purchase. As a result, those loans that did get done during the dark days of July and August were essentially cobbled together by the underwriters and sold at heavily discounted prices.

September did not initially bring relief. But the recent rate cut by the Federal Reserve has jumpstarted the loan market, to an extent. The LCDX has recouped some of its losses and underwriters have managed to reduce the discount level they have to offer to sell loans. And just this week’s larger than expected sale of the First Data LBO financing ends an otherwise miserable third quarter on a more hopeful note.

But the drama is not over yet for the loan market. The market has seen some recovery but it remains far from its heady levels from earlier this year. A $200 million-plus leveraged loan pipeline stills casts its ominous shadow and jumbo LBOs for TXU Corp. and Alltel need to be financed. The chipping away of this calendar by cancellations of the Harman Industries and Sallie Mallie LBOs does rebalance the market to an extent, but maybe not enough.

he biggest comfort to the market through this period of turmoil has been the absence of defaults. But many in the loan market wonder how long that will last.

Overall league tables

J.P. Morgan was the leading bank loan arranger for 1-3Q07, with $381 billion and a 27% market share. Bank of America led $228.8 billion and racked up a 16% market share. Citi was third ($217 billion). Credit Suisse was fourth with $72.8 billion, followed by Wachovia, which took in $70 billion.

Rank	Bank Holding Company	Volume	# of deals	Market Share
1	J.P. Morgan	$381,684,215,755	588	27%
2	Bank of America	228,801,885,437	576	16%
3	Citigroup	217,023,294,808	276	15%
4	Credit Suisse	72,833,882,000	154	5%
5	Wachovia Securities	70,731,091,358	235	5%
6	Deutsche Bank AG	63,198,336,531	98	4%
7	Goldman Sachs & Co	46,512,489,173	81	3%
8	Merrill Lynch & Co.	34,864,949,392	74	2%
9	Lehman Brothers	31,013,140,236	60	2%
10	UBS AG	26,714,253,419	76	2%

LBO Lending

J.P. Morgan was the leading arranger of LBO loans for 1-3Q07 with $23.9 billion and a 15% market share. Goldman Sachs took the second slot with $21.9 billion and a 14% market share. The remaining top five slots were filled by Citi, Credit Suisse and Bank of America.

Rank	Bank Holding Company	Volume	# of deals	Market Share
1	J.P. Morgan	$23,972,968,714	28	15%
2	Goldman Sachs & Co.	21,941,428,664	28	14%
3	Citigroup	20,873,500,000	22	13%
4	Credit Suisse	18,317,947,300	40	11%
5	Bank of America	14,435,281,250	25	9%
6	Deutsche Bank	11,086,131,400	16	7%
7	Merrill Lynch & Co.	9,047,689,392	16	6%
8	Lehman Brothers	6,266,967,736	15	4%
9	Morgan Stanley	5,616,231,250	10	3%
10	Wachovia Securities	5,257,500,000	20	3%

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