LSTA Panel: Buy-side view of loan market positive, institutional investors show interest

By Andrea Heisinger

New York, Nov. 2 - The loan market looks good from the buy-side perspective, and institutional investors are looking at the space more closely, panelists said at the Loan Syndications and Trading Association conference in New York on Wednesday.

It's a good time fundamentally for institutional investors to invest in the loan market, although spreads need to be kept high to attract investors, said Beth MacLean, executive vice president and bank loan portfolio manager at Pimco.

An example of a recent innovation to appeal to investors was the Kinetic Concepts leveraged buyout carving a five-year tranche out of the term loan. It was geared toward collateralized loan obligation investors, and panelist Greg Stover, partner and head of fixed income at Stone Tower Capital LLC, said that it was "an effective way to place it in the market efficiently."

MacLean later said that the market needs to have call protection as a regular feature for high-yield investors to get comfortable.

She also said that settlement times need to be improved, calling the 15% rate of trade-date-plus-30-days settlement "embarrassing."

"We need to work on broadening the investor base in the retail market," she said.

On a global basis, institutional investors like pension funds, and insurance companies love loans, said Dan Norman, senior vice president at ING Investment Management.

"They want a shorter-duration product. The allocations have started to pick up," he said.

Norman picked up on MacLean's list of things that need to be fixed in the loan market, adding CUSIPs on every loan, call protection and improvements in transparency and structure.

The loan default rate is expected to pick up, Stover of Stone Tower said. Most of the concern lies with the lower-quality leveraged sector, he said.

There is a 2% to 3% default rate expected for 2013, and in 2014 it's set to jump to 6% to 8%, MacLean said.

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