Mutual funds that invest in leveraged loans may be pulling in less new money, but banks themselves have been picking up the slack in lending, putting them in competition with institutional investors and contributing to the general froth in the market.
U.S. leveraged lending slipped in the second quarter, to $151 billion, from $153 billion in the first quarter, according to Thomson Reuters; however, the share of loans funded by banks themselves increased by seven percentage points, to 43%.
Thomson Reuters' data on the pro rata portion of credit facilities includes both term loan As and revolvers.
It's the first time banks have increased their market share since late 2008 and early 2009, when issuance collapsed and banks were virtually the only source of capital in this market.
In the go-go years leading up to the financial crisis, most senior secured credit facilities consisted of a term loan B and a revolver, as banks found other places to put their money to work. While institutional investors made themselves scarce once the credit markets imploded, they returned to the loan market in force in late 2009 and had been steadily gaining market share from banks until this year.
"The A tranche term structure nearly disappeared from view for many years," said Eric Wise, a partner in the global finance group at the law firm Gibson Dunn & Crutcher. "I would assume that its revival must indicate that retention of those assets is more attractive for banks' balance sheets."
The fact that banks are increasing their market share at a time when overall issuance is slowing, or a least leveling off, might suggests banks are merely stepping in again to replace capital institutions are no longer willing to provide. Indeed, a number of borrowers pulled leveraged loan offerings during the quarter after the deals failed to attract sufficient interest at the prices they were seeking.
Yet banks are largely expanding their market share among the highest-rated leveraged loans. "For banks, double-B credits are their sweet spot," said Darin Schmalz, director at Fitch Ratings. He said issuance by double-B-rated borrowers "has definitely picked up, due to the fact that banks are more willing to hold these loans on their balance sheet."
In some cases, the pro rata portion of credit facilities is much larger than the institutional portion. For example, in early June, BB-rated Endo Pharmaceuticals obtained a $1.5 billion term loan A, a $900 million term loan B and a $500 million revolver. The $2.9 billion facility was used to refinance existing debt and finance the acquisition of American Medical Systems.
Later that month, Penn National Gaming, which is also BB-rated, obtained a $2.15 billion senior secured credit facility consisting of a $700 million term loan A, a $750 million term loan B and a $700 million revolver. It was used to refinance existing bank debt and extend maturities.
In both cases, at least one ratings agency, Standard & Poor's (S&P), awarded the credit facilities even higher marks than the issuers' corporate credit rating. Both deals earned a BBB-minus rating, putting them in investment-grade territory.
Among other credit facilities with large pro rata components that came to market in the second quarter, BB-rated AMC Networks obtained a $1.16 billion term loan A, $565 million term loan B and $500 million revolver in June to finance its spin-off from Cablevision.
Also in June, Team Health took out a $300 million term loan B, a $165 million revolver and a $110 million term loan A. S&P rated the deal BB, one notch higher than the issuer's corporate credit rating.
And in May, diversified industrial industry manufacturer Manitowoc obtained a $400 million term loan B, a $350 million term loan A and a $500 million revolver. The company is rated B-plus, but S&P awarded the credit facility a BB rating.
There were some deals with large pro rata components in the first quarter as well. In March, Warner Chilcott took out a $2.25 billion term loan B, $750 million term loan A and a $250 million revolver; the facility was used to refinance a $1.02 billion term loan B and $480 million term loan A the company obtained in August 2010 to fund a shareholder dividend.