Uncertainty surrounds continued participation of non-traditional investors in loan market

By Sara Rosenberg

New York, Oct. 28 - The entrance of non-traditional lenders, such as hedge funds and distressed funds, in the bank loan market has proved to be a positive occurrence as it has helped improve liquidity.

But questions remain as to how long these new players plan to stick around and whether or not they have increased or decreased volatility.

These investors comprise just shy of 10% of the institutional market, said Mark S. Lies, managing director, global head of loans and co-head of global leveraged finance at Lehman Brothers, at the Loan Syndications and Trading Association conference in New York.

At the beginning of the year these non-traditional players had significant opportunities with certain deals that were priced at Libor plus 500 basis points or higher. Despite the decrease in such opportunities, hedge funds have stayed in the market.

"Because of the nature of where interest rates are, they will stay in some of the situations," Lies explained. Whether these investors are here to stay, "it depends on the nature of the particular fund and what their alternatives are," he added.

As for volatility, according to Lies, these investors have actually "minimized a lot of volatility in a pretty dramatic credit cycle."

"I think that the opportunistic investors gave us the ability to solve corporate finance problems that normally couldn't be solved," Jonathan D. Calder, managing director at Citigroup Global Markets, said in agreement.

However, there was one dissenting opinion on the panel who took the standpoint that hedge funds and other non-traditional players have actually brought increased volatility to the loan market.

"[They're] more focused on relative value," said Anthony R. Clemente, head of the bank loan group at Invesco. "They can move from asset classes more freely. I do think they're here to stay. This is the evolution of the market and we'll just have to get used to the increased volatility."

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