LSTA panel: CLO disappearance could shift loan demand; loans favored over plentiful senior secured bonds

By Andrea Heisinger

New York, Oct. 29 - Loan demand could come from other sources if collateralized loan obligations were to disappear completely, panelists said at the Loan Syndication and Trading Association conference in New York City on Thursday.

If that happened, loans would be more volatile than they have been historically, said panelist Dan Norman of ING Investment Management. Credit and equity issuance would return to a more stable place, he added.

Loans that were attractive to CLOs "were basically supported by dedicated investors in the past two years," panelist Bob Bernstein of Macquarie Funds Group said.

The panelists then talked about unleveraged loan returns. Paul Kauffman of Highland Capital Management said he thinks it will be about 8%, with some investors adding high-yield or distressed debt into their portfolios.

"Unleveraged buyers are relative value buyers," said Bob Wagner of Silver Point Capital.

Bernstein chimed in and said that "it doesn't work unless returns are in the high double digits."

There has been a large amount of senior secured bond issuance recently, with $50 billion year to date, which is more than activity in the institutional loan market.

"I still think loans make a lot of sense," Kauffman of Highland Capital said. "My guess is the trend [of bond issuance] will go down. There are still going to be a lot of senior secured bonds out there."

Norman agreed, saying that "bond issuance has been great, but don't count loans out."

There will likely be continued issuance of senior secured bonds, said Glenn Stewart of Bank of America Merrill Lynch.

"It will be an instrument to reset the market," he said. "[We've] got a big Libor curve ahead."

The panelists discussed where money would be coming from in 2010 and after. Bernstein weighed in by saying it would be institutional managed funds and loan funds. Spreads remain wide, and investors will come in on a selective basis, he said.

Banks will be returning to the leveraged loan market, Stewart said.

"They're coming back now, like they always do. They're at the top of the credit cycle now, and then they'll trickle down."

Wagner described the financial crisis of the past 12 to 18 months as "one big pendulum swinging. It's not clear we're going to have a real robust recovery here."

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