Huge institutional interest needed to syndicate loans in current market, B of A director says

By Sara Rosenberg

New York, Dec. 4 - Successful syndication of new deals in the current bank loan market environment requires broad support from the institutional market, according to Glenn Stewart, managing director at Banc of America Securities LLC.

Currently, 70 to 80 accounts are needed to get a $700 to $800 million deal done, Stewart said during a panel discussion at the Standard & Poor's Loan Ratings & Recoveries in the Current Economic Climate conference in New York Wednesday.

As a comparison, he said that not too long ago a $600 million deal could get done with five people.

As far as spreads are concerned, they have been widening because Libor is so low right now, Stewart said.

The average spread of BB/BB- institutional loans was around 400 basis points in October and has gone up to a current level of about 413 basis points, said Steven Miller, managing director of S&P's leveraged commentary and data.

Overall, traditional leveraged bank deals today basically consists of 60% institutional, with the remaining 40% pro rata. However, this is not true in every case.

According to Stewart, it depends on the size of the deal. One example he gave was the recently launched Del Monte Foods Co. loan, which falls into this traditional break down with $800 million of institutional paper and $600 million of pro rata. But, smaller deals, especially in the middle-market sector, will likely obtain small revolvers and look to the institutional market for the rest, Stewart said, explaining that the number of banks willing to lend to these companies has decreased - as has the number of banks in general.

In the institutional market, CLOs are the primary investors, accounting for about 75% of the market, according to S&P research. Prime funds account for about 20% and 'other' accounts for about 5%.

Prime funds are expected to increase their activity when interest rates move up, according to Mike Hatley, president and chief investment officer at ING Capital. In agreement with this prediction, Howard Tiffen, senior vice president at Van Kampen, said that the market is at a point where the likelihood of an increase in rates is closer than it was previously and therefore, Prime Funds, meaning retail, may pick up.

From January through Nov. 15, S&P/LSTA leveraged loan index annual returns were negative 0.20%, compared to 2.1% in January through October 2001, according to Miller. The average bid price is now around 86 to 87, compared to an average bid price around 90 in July.

"Liquidity spikes" have really driven a lot of what's going on in the secondary, said Tiffen, in explanation of why the numbers have moved down.

Retail funds have had redemptions all year, added Hatley. It's easier to sell Charter or Allied Waste than a $150 million middle-market deal so bids have been going down, he explained.

However, over the past few weeks, the bank loan market has rallied. According to Hatley, there has been a huge turnaround in prices over the last six weeks with Charter moving up six to seven points in November.

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