Leveraged loan market expected to be less busy in 2008

By Paul Deckelman

New York, Dec. 5 - The current credit crunch will have lingering effects on the leveraged loan market in 2008, panelists at a financial industry conference agreed on Wednesday.

They told attendees at Standard & Poor's Annual Leveraged Debt & Recovery Credit Conference in New York that it was a virtual certainty that loan origination volume might be down anywhere from 10% on the low side to as much as 40% or more on the high side, although nobody really thinks the decline will be that big.

"I don't think there's any question that volume will be down," declared Peter J. Nolan, managing director of syndicated and leveraged finance in the Loan Capital Markets Group at JP Morgan.

He said the major casualty would be "huge LBOs" like those seen earlier this year, with transactions likely to result in smaller deals coming to market.

Another panelist, Jonathan R. Insull, managing director of Trust Company of the West's bank loan group, said that market activity "clearly is going to be down - even right now, we're still working off [a backlog of] deals from July." However, he said that such a slowdown "won't necessarily be a bad thing."

"We have had so many record years in a row," each with higher volume than the one preceding it, "so if there's a return to rationality," and a few less deals coming in, "that's not a bad thing."

"If we are declining from 2007's total, it's from a record level," noted the panel's moderator, S&P managing director William Chew, in introducing the topic. With slightly less than one month left in the year, one of the panelists estimated volume at some $525 billion, about a 10% rise from the 2006 figure.

The panelist, Steve Miller of S&P's publication Leveraged Commentary & Data, laid out several likely scenarios for prospective 2008 issuance - a best-case projection of a 10% decline, a mid-range prediction of a 30% slide, and a worst-case scenario - Miller called it a "total wipeout" - calling for a decline of between 40% and 50%, although he added that "the optimist in me says that won't be the case."

JP Morgan's Nolan thinks the decline could reach "the 30s," while TCW's Insull said more generally that it would be "in the middle of the range. Down 15% to 25% is reasonable. Down 50% is very dramatic," and by that point "someone would step in."

Miller noted that the worst new-issuance decline since 1997 came in 2000-2001, when high-tech and telecom deals were blowing up in investors' faces and default rates were rising - and even then, he said, it was no worse than 28%.

Recovery seen 'gradual'

Nolan said that while there eventually would be a recovery in the leveraged-loan market, it would be "gradual" and contingent on many factors, including the continued participation of private-equity investors, who now make up a large part of the market. But near-term, "the new-deal flow will not be as significant as it was."

Insull said there was "no magic" way to suddenly revive the market. "A $160 billion backlog [of hung-up deals] is not going to [quickly] go down to $10 billion." It would have to be "chipped away."

But ultimately, said Nolan, "a fundamental need [on the part of borrowers] for capital is always there, and a need to invest. We've had a disruption, but it's one that we can cover."

Even if it won't approach this year's record issuance totals, " 2008 can be a very good year in a longer-term context."

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