LSTA panel: Leveraged loan outlook positive, bond issuance outweighs loans, M&A rebirth could spur growth

By Andrea Heisinger

New York, Oct. 29 - The leveraged loan market is looking up compared to where it was a year ago, panelists said at the Loan Syndications and Trading Association conference in New York City on Thursday.

An important lesson learned in the past year was how important leverage is, said panelist Tom Newberry of Credit Suisse.

Another panelist, Rick Stewart of Nomura Corporate Research and Asset Management, said that the loan asset class was unstable prior to September 2007. "We have to build a more diversified investor base to not see volatility we have in the past 24 months," he said.

The primary market's comeback will be driven by mergers and acquisitions, said Andy O'Brien of JPMorgan Chase. "Spreads are at more reasonable levels," he told the conference.

Newberry said the recent Warner Chilcott plc loan was a sign of how quickly the market has come back from its slump.

"The books in the Chilcott and Reynolds deals were multiples of billions of dollars," he said. "The appetite for diversity in the primary market is driving the market. You can't trade the same kind of deals over and over again."

Issuers have become reluctant to issue in the leveraged loan market because of uncertainties, Newberry said. Mergers and acquisitions have slowed because of the difficulty of getting financing, he said, adding that it is the reason for senior secured bonds in the high yield market topping $44 billion this year.

"They're using that [bonds] as financing," he said.

Loans are starting to come back, O'Brien said, adding that over time there will be less secured issuance in the high yield market because unsecured will be the choice if it is an option.

Spreads will stay relatively wide in response to wider bond spreads, especially for larger deals at lower ratings, Newberry said.

O'Brien said that spreads are important, but "you can't ignore the yields right now."

Issuers are also looking for maturity extensions on loans and asking how long they should wait to refinance it, he said.

Panelist Greg Stoeckle of Invesco said that it will take well into 2010 to develop new investors.

Stewart, of Nomura, said that "one thing the downturn did, good or bad, was bring focus on our asset class."

Loans remain attractive, panelists said, and the traditional buyers are the same.

The leveraged loan market has been stigmatized by the defaults, Stoeckle said. "The old ratings agency convention has trained us to think poorly of the word 'default.' I'm not surprised to see how well high-yield bonds have done."

There needs to be optimism about market growth, Newberry said.

"It's going to require the rebirth of the securitized loan market," he said. "The M&A pipeline has been dead for two years, but I think it will come back."

Stewart looked ahead at the growth of high-yield bonds and leveraged loans.

"We don't need significant growth to get there, we just need M&A activities to move forward," he said.

There are early indications of leverage availability, Stoeckle said, adding that "when we get the economics to line up, we will see a return to securitized loans."

The panelists were asked about their outlooks for 2010, and what their worries and hopes were for the market in the coming year.

Newberry said he is hoping for reasonably stable market conditions, and he is worried there won't be any deal flow.

"I just hope we go back to a bull market," O'Brien said.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.