Tuesday, March 28, 2006

Wall Street firms ride leveraged loan wave

Leveraged loans are similar to hedge funds, in that they provide financing to companies with credit ratings below investment grade. But there are some several distinctions.

Companies which don't want a long term commitment can pay off leveraged loans ahead of maturity without penalty, and there tend to be fewer rules attached to the money. Investors like them because they have a higher priority over bonds for companies in bankruptcy and they offer attractive yields that float with market rates.

Demand for leveraged loans has also been driven by investors hungry for yield, allowing issuers to "flex up" the size of offerings and pay smaller coupons. That has made the loans very popular among leveraged buyout firms.

According to Reuters Loan Pricing Corp., U.S. LBO financing volumes rose by half to $78 billion last year. Business is likely to remain strong this year, bankers said, with interest rates expected to remain low and buyout funds amassing cash and prowling for increasingly big deals. Leveraged loans have also emerged as an alternative to junk bonds.

Bankers say these are the best times ever for leveraged lending, with U.S. and European demand more than doubling over the past five years. Rampant M&A activity, cheap money and the growing ease of trading loans has turned leveraged lending into a global securities business rivaling junk bonds, bankers said. Many of the bankers, though, cautioned that the current bull market could turn sour quickly if funding costs and unusually low default rates were to rise. Junk bonds, bankers added, will regain popularity as issuers lock in low rates for the long term.

For now, though, Wall Street expects the leveraged lending business to remain a major contributor this year and going forward.

CORRECTED: Wall Street firms ride leveraged loan wave
By Joseph A. Giannone
NEW YORK (Reuters)

1 comment:

Market Participant said...

Leveraged loan's are good thing. They allow more speculative companies to financed on better terms than from the junk bond markets.

At the same time the mass syndication of these loans lets banks and investors diversify risk and build portfolio's of loan participations.