The U.S. leveraged loan market has existed for some time, but in recent years issuance has exploded. Issuance totaled $1.14 trillion in 2013 according to Thomson Reuters, up 71% from $664 billion issued in 2011 and up 85% from $612 billion issued in 2006 immediately before the onset of the financial crisis. Once obscure until high yield bonds became part of mainstream financings 25 years ago, leveraged loans are now an asset investors, banks and other lenders target for several reasons. Leveraged loans are higher in a company’s capital structure than high yield bonds and thereby provide greater protection in the event of a default. LIBOR-based pricing offers favorable re-pricing characteristics whenever the Federal Reserve begins to raise short rates. Also, leveraged lending diversifies (and provides yield) to a typical bank’s real estate heavy portfolio.
Growth in issuance, the search for yield and loosening standards that include more covenant-lite and PIK/toggle structures, have resulted in intensified regulatory and rating agency scrutiny of the leveraged lending market. During 2013, bank regulators adopted leveraged lending guidance, which replaced interagency guidance adopted in 2001. Regulators have provided guidance regarding acceptable leverage (as measured by EBITDA), debt amortization expectations regardless if an institution intends to hold or distribute a loan, enterprise valuation approaches to be applied to the borrower, and other risk management expectations.
There has been a flurry of media reports this year that regulators—especially the OCC—are intensifying scrutiny of leveraged lending and are becoming less flexible in allowing banks to interpret the guidance. Some investors have begun to raise questions whether a new credit bubble has developed, while others see opportunities for BDCs and other specialty finance companies to gain market share. In this webinar we will take a look at one of the fastest growing markets that has emerged post crisis.
Introduction and overview of the leverage lending market
- Regulatory framework that governs bank participation in the market
- How the regulatory framework is evolving with recent regulatory guidance and interpretations
Leverage Lending Market
- Mechanics of the market and its risks
- Loan pricing history
- Default rates
- Investor profiles (CLOs vs. Institutional Buyers vs. Banks)
- Need by the lending to establish enterprise value of the borrower as directed by the leverage lending guidelines
- Valuation issues related to marking loans
- By banks that have reason to mark leveraged loans
- By BDCs and other entities that are mandated to have third-party valuation or assurance opinion
Moderator: Andrew K. Gibbs, CFA, CPA/ABV
Senior Vice President
Jeff K. Davis, CFA
Ralph F. (Chip) MacDonald, III
Executive Vice President, Head of Assets
Richard T. Young