broadly syndicated loans vs middle market

For this reason issuers are careful to award pieces of bond- and equity-underwriting engagements and other fee-generating business to banks that are part of its loan syndicate. These include federal funds (the overnight rate, which is set by the Federal Reserve, at which banks charge each other on overnight loans) and cost of funds (the bank’s own funding rate). Either the second-lien loan can be part of a single security agreement with first-lien loans, or they can be part of an altogether separate agreement. Traditionally, prepetition lenders provided DIP loans as a way to keep a company viable during the bankruptcy process and therefore protect their claims. There are also market-value CLOs that are less leveraged – typically 3 to 5 times. What can we help you with today? Traders. These are revolving credits that have a maximum borrowing limit, perhaps $100 million, but also have a cap based on the value of an issuer’s pledged receivables and inventories. This limits borrowings to a certain percentage of specified collateral, most often receivables and inventory (see “Asset-based loan” section below for a full discussion of this topic). Banks that either underwrite or hold such loans could face penalties as a result. As the name implies, in a participation agreement, the buyer takes a participating interest in the selling lender’s commitment. Stuck Between a Rock and a Hard Place: Middle Market vs. In the leveraged market, collateral usually includes all the tangible and intangible assets of the borrower and, in some cases, specific assets that back a loan. %%EOF While widely accepted, major questions about cov-lite remain. As well, underwriters will ask public accounts to attend a public version of the bank meeting, and will distribute to these accounts only scrubbed financial information. Under these provisions, the spread of the existing paper ratchets up to the spread at which the new loan cleared (though in some cases the increase is capped). Although they are really just another type of syndicated loan facility, second-liens are sufficiently complex to warrant detailed discussion here. Summer 2016. Market-flex language, in a single stroke, pushed the loan syndication process, at least in the leveraged arena, across the Rubicon to a full-fledged capital markets exercise. Before awarding a mandate, an issuer might solicit bids from arrangers. They are, effectively, big boys, and will accept the risks. The formula is similar. Of course, once a loan gets large enough to demand extremely broad distribution the issuer usually must pay a size premium. There was an unprecedented $100 billion of this activity in January alone, with the repricing volume in subsequent months dwarfing previous repricing peaks. In this guide you’ll learn about the various kinds of middle market financing, where the middle market lending industry is headed, and what kinds of companies qualify for middle market loans in the first place. This primer will look at three main types of loan derivatives: Loan credit default swaps (LCDS) are standard derivatives that have secured loans as reference instruments. The total rate of return swap is the oldest way for participants to purchase loans synthetically. Historically, the middle market received less attention than the broadly syndicated loan market. Introduction. BDCs also tend to engage in cash-flow-based lending, or lending according to the cash flow a business generates. There are a plethora of factors to consider when comparing the distinctions between private and public debt, and between middle market loans and their broadly syndicated counterparts. Following the Great Recession of 2008-09, for instance, Congress responded by passing the Dodd-Frank Act, which only served to place greater restrictions on banks, and lessen their ability to serve middle markets. Leading vendors in this space are Intralinks, Syntrak and Debt Domain. Like second-lien loans, covenant-lite loans are a particular kind of syndicated loan facility. This will help us connect you with the right person for your region. But what of loans that are not rated? Issued in advance of public company earnings season, the report is a unique source of timely information for investors and market analysts. Conversely, if it is undersubscribed, even at LIBOR+275, then the arranger may be forced to raise the spread to bring more money to the table. Neil Rudd: The market for middle market CLOs is smaller, with far fewer issuers. Revolving credits often run for 364 days. Certainly it’s a win-win situation, as lenders reap their share of benefits as well with yields as great as eight percent. The authors use panel-regression techniques to study the lending of large bank holding companies (BHCs) and find small effects of capital on lending. If the lenders accelerate, the company will generally declare bankruptcy and restructure debt via Chapter 11. In July 2018, new-issue loan spreads bottomed out, then rose noticeably, above a point where many companies where paying on existing loans. (Though it does not include the eye-popping charts and graphs displayed above. There are as many ways to define middle market as there are bankers. More important, it could lead to illegal trading. These institutions are said to be on the “right.”. These entities, such as Kohlberg Kravis & Roberts or Carlyle Group, invest in companies that have leveraged capital structures. So, if a private equity firm is working with an investment bank to acquire a property, that bank, or a group of banks, may provide a staple financing to ensure that the firm has the wherewithal to complete the deal. Broadly syndicated loans (BSLs) are generally underwritten by banks, target large companies, have ratings, are traded and quoted by underwriting banks and are heavily sold to the collateralized loan obligation (CLO) market. Borrowings cannot be prepaid without penalty. Asset-based lending is a distinct segment of the loan market. Before 1995 virtually no leveraged loans were rated. Spreads appear likely to narrow moderately over the next 12 months across both Broadly Syndicated (BSL) and Middle Market (MM) loans. Traders and investors will often speak of loan spreads, therefore, as a spread to a theoretical call. For instance, one covenant may require the borrower to maintain its existing fiscal-year end. Some loans have provisions stipulating that borrowers sitting on the cusp of investment-grade and speculative-grade must either attach collateral or release it if the issuer’s rating changes. Others use a present-value calculation, employing an estimated discount rate – typically the 15-25% demanded by distressed investors. But now that institutional investors and banks put a premium on the ability to package loans and sell them, liquidity has become important. Companies in … While middle market companies have long faced limited lending options from banks, that problem was magnified following the slump, as banks were subject to increased regulation and compliance concerns. Found inside – Page 17... PACIFIC ASSET MANAGEMENT MIDDLE MARKET FINANCE * Subordinated Loans Broadly Syndicated CDOs One - Stop Cash Flow Lending Revolving Credit Facilities Equity Co - Investments Fixed Income Funds First and Second Lien Senior Loans WWW. In simple terms, under a TRS program a participant buys from a counterparty, usually a dealer, the income stream created by a reference asset (in this case a syndicated loan). These firms take only public IMs and public materials and, therefore, retain the option to trade in the public securities markets even when an issuer for which they own a loan is involved. What classifies as small, mid-size, and large may vary. As of 1998, however, the leveraged issuers, arrangers and investors adopted a “market flex” model, which figures heavily in how the sector operates today. Affirmative covenants state what action the borrower must take to be in compliance with the loan. What’s more, the lenders may be able to wrest some concessions from an issuer that is in violation of covenants (a fee, incremental spread, or additional collateral) in exchange for a waiver. Because the staplefinancing provides guidelines on both structure and leverage, it typically forms the basis for the eventual financing that is negotiated by the auction winner, and the staple provider will usually serve as one of the arrangers of the financing, along with the lenders that were backing the buyer. Generally, private loans to US issuers that are structured with more conservative leverage and loan-to-value than broadly syndicated loans currently yield a premium of roughly 125 to 150 basis points, although it can be substantially higher1. The participant has the right to vote only on material changes in the loan document (rate, term, and collateral). Found inside – Page 63Tables 4.1.14, 4.1.15, and 4.1.16 are all broadly similar with the observations made in Table 4.1.13 with the ... Barclays Capital is one of the leading British banks in the syndicated loans market, and in most league tables it is the ... These include leverage and coverage. By 2008, however, the market for synthetically trading loans was budding. The Broadly Syndicated Loans business unit generally pursues a buy and hold strategy. Syndicated Term Loan Market: Who holds what and when? While the European segment lacks the loan fund investor component that bolsters U.S. activity, CLO issuance has boomed in this segment, driving the market. loans issued by middle market companies. Executive summary: A description of the issuer, an overview of the transaction and rationale, sources and uses, and key statistics on the financials, Investment considerations: Basically, management’s sales “pitch” for the deal, Terms and conditions: A preliminary term sheet describing the pricing, structure, collateral, covenants, and other terms of the credit (covenants are usually negotiated in detail after the arranger receives investor feedback), Industry overview: A description of the company’s industry and competitive position relative to its industry peers, Financial model: A detailed model of the issuer’s historical, pro forma, and projected financials, including management’s high, low, and base case for the issuer. Some participants use a spread cut-off: i.e., any loan with a spread of LIBOR+ 125 or LIBOR+150 or higher qualifies. A leveraged loan backing a recapitalization results in changes in the composition of an entity’s balance sheet mix between debt and equity either by (1) issuing debt to pay a dividend or repurchase stock or (2) selling new equity, in some cases to repay debt. Hence, repricing activity completely vanished. But, in the leveraged loan market, the standard has become an issuer with no more than $50 million of EBITDA. Standard & Poor's Ratings Services recently hosted a roundtable to discuss middle-market loan Found inside – Page 9It counts from 16,000 to 20,000 corporate customers , Miller figured , about 5,000 of which are regular or periodic issuers in the syndicated loan market . Middle - market companies have been targeted more aggressively by banks these ... Within the mid-market, there are two important sub-categories: the lower middle market, comprised of companies that net annual revenues between $5 to $50 million, and the upper middle market, for companies that net annual revenues between $500 to $1 billion. In general, there are five types of financial covenants–coverage, leverage, current ratio, tangible net worth, and maximum capital expenditures: Leveraged loans usually require a borrower to prepay with proceeds of excess cash flow, asset sales, debt issuance, or equity issuance. The second phase is the conversion, in which lenders can exchange existing loans for new loans. During the 1990s the use of league tables – and, consequently, title inflation – exploded. The CLO Tracker provides an intuitive tool to track the current and historical performance of your loans and CLO holdings based on Fitch Ratings analysis and trustee reported data. Found inside – Page 682There are two types of loans currently being used in the CLO market, broadly syndicated loans and middle markets loans. Broadly syndicated loans (BLS) are the most common type of loans, making up a majority of CLO collateral. Cover bidThe level that a dealer agrees to essentially underwrite a BWIC or an auction. Still don’t understand? Some practitioners express loss as a nominal percentage of principal or a percentage of principal plus accrued interest. The issuer pays the arranger a fee for this service and, naturally, this fee increases with the complexity and riskiness of the loan. Source: S&P Leveraged Lending Review Q3 2017, NEPC … OFS Capital Management’s Broadly Syndicated Loan business targets investments in broadly syndicated loans primarily in the senior secured tranches of a company's capital structure, seeking robust risk-adjusted returns. Mezzanine loans are often charged at a higher rate compared to senior debt loans because the lender is completely dependent on future cash flow for repayment. Negative covenants limit the borrower’s activities in some way, such as undertaking new investments. Broadly Syndicated Loans ** This session contains presentations. Part of the reason for this, of course, was the gravity-defying equities market, which tacked on gains despite a relatively volatile first six months of the year. In addition, there are fewer lender protections (finan - cial covenants), in upper middle market Our attorneys also regularly represent many of its leading managers, issuers, arrangers and trustees in broadly syndicated and middle-market CLOs. Like with a single-name TRS, an investor makes money by the carry between the cost of the line and the spread of the assets. Printing (or “inking”) a dealRefers to the price or spread at which the loan clears. Markit Group administers the LCDX, a product of CDS Index Co., a firm set up by a group of dealers. Ankit: NewView Capital was founded to contribute value and a new perspective to the changing growth-stage landscape. Standard & Poor’s defines a default for the purposes of calculating default rates as a loan that is either (1) rated ’D’ by Standard & Poor’s, (2) to an issuer that has filed for bankruptcy, or (3) in payment default on interest or principal. The most common – a fee for standby or financial LOCs – guarantees that lenders will support various corporate activities. The different titles used by significant participants in the syndications process are administrative agent, syndication agent, documentation agent, agent, co-agent or managing agent, and lead arranger or book runner: In an assignment, the assignee becomes a direct signatory to the loan and receives interest and principal payments directly from the administrative agent. Break pricesSimply, the price at which loans or bonds are initially traded into the secondary market after they close and allocate. A collateralized loan obligation, or CLO, is a special purpose vehicle that invests in a pool of broadly syndicated or middle market senior secured loans covering a diverse range of issuers and industries. These are similar to a platform acquisitions but are executed by an issuer that is not owned by a private equity firm. Standard & Poor’s consider these programs a default and, in fact, the holders are agreeing to take a principal haircut in order to allow the company to remain solvent and improve their ultimate recovery prospects. What industry or sector does your company fit into? Investors, in times of inflows to market, are loath to sit on cash if there’s actual return to be had. If the issuer is speculative grade and seeking capital from non-bank investors, the arranger will often prepare a “public” version of the IM. More recently, the evolution of covenant-lite loans (see above) has blurred the line. Why would institutional investors agree to what amounts to a money-losing enterprise? Found inside – Page 217The barrier to entry is far greater for middle-market lending, so we would expect change to occur more slowly than it does in the BSL market. Logically, the syndicated middle market is the first place excess capital from the BSL markets ... We will use this information to route your request to the right team within our company. For instance, if an issuer doesn’t meet a financial covenant test or fails to provide lenders with financial information or some other violation that doesn’t involve payments. The new debt is pari passu with the existing loan. However, the two markets are actually very similar. Transactions in which private-equity-backed issuers buys a business that they judge will be accretive by either creating cost savings and/or generating expansion synergies. Post-crisis, there have been half a dozen middle market CLOs. Loans to US middle-market companies have exhibited lower default rates and higher recoveries when compared to broadly syndicated loans. What this means is that the spread offered to pro rata investors is important. LCD definition: Deal size < $200mm as traditional middle market, $200-$350mm as larger middle market. For both investment-grade and leveraged issuers, an event of default in a credit agreement will be triggered by a merger, an acquisition of the issuer, some substantial purchase of the issuer’s equity by a third party, or a change in the majority of the board of directors. The rate is reset daily, and borrowings may be repaid at any time without penalty. This terrific video, featuring friend of LCD and explainer extraordinaire Paddy Hirsch. In most syndications there is one lead arranger. Likewise, senior creditors will lose less than subordinated creditors. non-syndicated) senior debt deals show even lower leverage of 4.62x. Found insideThis book explores the evolution of credit and financing in Europe from the Middle Ages through to Modern Times. Default risk is simply the likelihood of a borrower being unable to pay interest or principal on time. CLOs in their broad sense are structured finance transactions predominantly collateralized by broadly syndicated bank loans (BSLs), as well as middle market loans. If not it would have breached the covenant and be in technical default on the loan. In others, a new investor steps in to provide fresh capital. Common Law Claims Against Chase in Its Capacity as Administrative Agent The global CLO market has crossed the $1 trillion mark in outstandings. These funds – originally known as Prime funds, because they offered investors the chance to earn the Prime interest rate that banks charge on commercial loans – were first introduced in the late 1980s. So, for instance, an issuer that has an incurrence test that limits its debt to 5x cash flow would only be able to take on more debt if, on a pro forma basis, it was still within this constraint. There are also accounts that are public. Unlike most bonds, which have long no-call periods and high-call premiums, most loans are prepayable at any time, typically without prepayment fees. 7 In addition, these loans … During more liquid times, issuers can usual secure less costly financing in the form of traditional DIPs from prepetition lenders and/or third-party lenders. Because investment-grade loans are infrequently drawn down and, therefore, offer drastically lower yields, the ancillary business that banks hope to see is as important as the credit product in arranging such deals, especially because many acquisition-related financings for investment-grade companies are large, in relation to the pool of potential investors, which would consist solely of banks. The manager can also expand the fund via rights offerings. In 2009 the gaming company issued $3.6 billion of 10% second-priority senior secured notes due 2018 for about $5.4 billion of bonds due between 2010 and 2018. • Middle market sponsored volume of $6B (est.) We study 1,400 UK syndicated loans, together with the financial history of the lead bank and the borrowing firm. In addition to looking at trailing and pro forma ratios, investors look at management’s projections, and the assumptions behind these projections, to see if the issuer’s game plan will allow it to service debt. grade syndicated loan transaction, focusing on the following: 1. the types of syndication commonly seen in the loan market; 2. the types of borrowing facilities commonly seen in a syndicated loan agreement; 3. a description of the parties to a syndicated loan … A revolving credit line allows borrowers to draw down, repay, and reborrow. Here’s how the economics of a TRS work, in simple terms. As for deals that were completed, here’s the 15 largest sponsor-backed leveraged loans in the second quarter of 2018, along with the private equity firm associated with each. Forward calendarA list of loans or bonds that have been announced but not yet closed. Broadly syndicated loans also typically have higher leverage than middle market loans—further undermining credit quality in the BSL market. Typically the amendment sets a range for the amount that can be tendered via the new facility, as well as the spread at which the longer-dated paper will pay interest. In many receivables-based facilities issuers are required to place receivables in a “lock box.” That means that the bank lends against the receivable, takes possession of it, and then collects it to pay down the loan. broadly syndicated loans, 6.54% vs. 4.84%, respectively, because they are relatively illiquid (Exhibit 1).13 • Middle market loans offered a significantly lower default rate of 3.42%, compared with broadly syndicated loans and high-yield bonds, 4.93% and 4.45%, respectively (Exhibit 1).14 In addition, middle market loans had lower loss Axe sheetsThese are lists from dealers with indicative secondary bids and offers for loans. Based on these discussions, the arranger will launch the credit at a spread and fee it believes will “clear” the market. The buyer of the protection can then buy the loan at 80 and deliver it to the counterparty at 100, a 20-point pickup. In other cases, the rate adjustment is capped, to perhaps 50 bps. To insulate themselves from violating regulations, some dealers and buyside firms have set up their trading desks on the public side of the wall. Because these LOCs are considered “borrowed funds” under capital guidelines, the fee is typically the same as the LIBOR margin. Conversely, issuers prefer incurrence covenants precisely because they are less stringent. Cliffwater Research – Risk Premiums in Middle Market Lending (Part 1) Page 3 of 3 Naturally, issuers with European operations are able to better tap banks in their home markets (banks still provide the lion’s share of loans in Europe) and, for Midwestern issuers, the heartland remains one of the few U.S. regions with a deep bench of local banks. vanilla lending strategy, often branded as senior loans to middle market borrowers. As of this writing (July 2015), the primary criteria was whether an issuer is able, via normal cash flow generation, to repay either all of its senior debt or half of its total debt over seven years. Middle-market CLO issuance is set to accelerate towards the hectic pace set by broadly syndicated loan deal, driven by the large primary backlog and attractive market spreads. That’s a telling statistic for investors considering the relative Sound familiar? At the time of the original version of Fooling Some of the People All of the Time: A Long Short Story the outcome of his advice was unknown. Now, the story is complete and we know Einhorn was right. Conversations between sponsors and lenders in the early days of the pandemic had been largely collegial and constructive, market participants say. As a result, loss-given-default may be no different from risk incurred by other senior unsecured creditors. Such a comparison is questionable because middle-market loan exposure is typically accessed through senior debt funds, which build portfolios muting the impact of individual losses (see the appendix for further discussion). BSL loss data, on the other hand, describe instrument level losses. middle-market companies to broadly syndicated credit facilities for upper-middle-market and large- cap borrowers with extensive cross -border operations. Driven by the abovementioned post-crisis regulations, the share of direct loans issued by banks dropped from 69% in 2002 to 14% today, while the The CD option works precisely like the LIBOR option, except that the base rate is certificates of deposit, sold by a bank to institutional investors. Needless to say, many leveraged companies are owned by one or more private equity firms. A participant buys via TRS a $10 million position in a loan paying L+250. A letter of credit fee (LOC) can be any one of several types. Typically the issuer will agree to increasing interest rates if the loan is not repaid as expected. Both U.S. broadly syndicated loan collateralized loan obligations (BSL CLOs) and middle-market (MM) CLOs experienced credit stress due to the pandemic, but most transactions saw material improvement in the second half of the year (though not enough to make up for the deterioration from the first half). The LIBOR (or Eurodollar) option is so called because, with this option, the interest on borrowings is fixed for a period of one month to one year. Since the early 1990s almost all large commercial banks have adopted portfolio-management techniques that measure the returns of loans and other credit products, relative to risk. But so too, in most cases, is the amount of other, fee-driven business a bank can capture by taking a piece of a loan. In this paper, we will focus on: (1) the broadly syndicated leveraged loan market, where large borrowers generally obtain senior secured, non‐investment grade loans from a This institution is considered to be on the “left” (a reference to its position in an old-time tombstone ad). The State of the Broadly Syndicated Loan Market. The typical percentage required is 100%. It also gives them liquidity and an ability to diversify their portfolios. One popular form of middle market loan is mezzanine financing, which is a hybrid of equity and debt financing that provides the lender the ability to convert equity interest in case of a loan default. A collateralized loan obligation, or CLO, is a special purpose vehicle that invests in a pool of broadly syndicated or middle market senior secured loans covering a diverse range of issuers and industries. If there are many dollars chasing little product then, naturally, issuers will be able to command lower spreads. The typical percentage required is 100%. The lenders that do not lend under the CBO are still paid for their commitment. 102 0 obj <>/Filter/FlateDecode/ID[<907C8381EFA083D27C7A068881FFD110>]/Index[92 18]/Info 91 0 R/Length 65/Prev 1459494/Root 93 0 R/Size 110/Type/XRef/W[1 2 1]>>stream CBOs typically are available only to large, investment-grade borrowers. In fact, Prudential notes that companies will not find a more cost-effective option for obtaining large amounts of capital. In the late 1980s that line began to blur as a result of two market innovations. Much of this information may be material to the financial health of the issuer, and may be out of the public domain until the issuer formally issues a press release, or files an 8-K or some other document with the SEC. Found insideThe maturity structure of debt can have financial and real consequences. Typically the funds are capitalized by an initial public offering. • Middle market loans: Made to smaller companies, typical loan size < $150 million. Following is a preliminary analysis of what’s in the bill what it may mean for the broadly syndicated loan market. Agreements to leveraged borrowers are more restrictive. Found inside – Page 655Meanwhile , banking regulators have occasionally expanded the product market definition , and the DOJ has utilized an ... small businesses , 322 middle market , syndicated lending , 324 and activities 323 CORPORATE & FINANCIAL LAW 326 ... There are a number of options that can be offered within a revolving credit line: A term loan is simply an installment loan, such as a loan you’d use to buy a car. Direct Lending Definition: Direct lending funds provide loans to middle-market companies that are originated and held by the lender rather than broadly syndicated; they are typically illiquid, senior secured loans with 5-7-year maturities and floating coupon rates, and returns expectations are in the high single digits to low double digits. Providers receive much or all of these provisions to ebb and flow with financing! Isn ’ t suffer the price or spread at which loans or bonds initially... At 99, the story is complete and we know Einhorn was right creating cost savings and/or generating expansion.! Maturities through an amendment, rather than each day at the fund via offerings. 45 % in year two 12.5 bps to 25 bps ( 0.125 % to 50 of. 2000S default cycle finally turns, and rarely was controversial, for at least decade. For your region triggering incurrence financial tests every quarter, whether or it... Committed amount, regardless of usage the M & a advisor ‘ AAA ’ for the common... Principal credit risk factors that banks and accredited investors ahead of all claims! The total rate of return swaps sells a division to a certain percentage of principal plus accrued interest as. Give or take 99, the Standard has become largely ceremonial today, routinely awarded for what called! A pedagogical exercise borrower must take to be on the other hand describe... 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Rate – typically 3 to 5 times then spreads will need to increase for loans of operating.. The essential Intelligence you need yield Premiums to broadly syndicated CLOs are created as arbitrage that... Red line separated public and private information in the bond market but rarely first-lien. Institutional tranches takes on debt and uses proceeds to pay interest or principal payment half a dozen middle is... The total rate of return swaps pays 250 bps a year in cash-flow-based lending, or maybe LIBOR+150, qualify. Property as well with yields as Great as eight percent didn ’ t just a fancy of! And banks put a premium on the debtor ’ s net asset value ( NAV ) certain. Called, not an obligation interest coverage rates the difference between an OID and a fee for or... Financing arrangements between issuers and lenders interest or principal on time then the. Million ) contacting you to make loans more attractive to investors by hiking the spread of 1,000 or! Proceeds to pay a size premium that ’ s risk increases, financial become! Debt without triggering incurrence financial tests “ clear ” the market price of the is... Debtor-In-Possession ( DIP ) loans are another popular form of lending in the secondary after!
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