Another Way To Judge The Overhang

January 21, 2008

I generally take a somewhat cynical view of what dealmakers say on public panels, simply because, market conditions be damned, they always seem to find something to wax optimistic about.

But I must admit that at last week’s annual meeting of the Loan Syndications and Trading Association, which included a panel on the “State of the Leveraged Loan Market,” a couple of bankers raised interesting points regarding the much discussed debt overhang, points that went beyond the usual grumbling about the backed up pipeline.

Often quoted in the fall at roughly $230 billion on the loan side, the pipeline has been whittled down to roughly $150 billion, which is still a significant amount to work through. “We’re going to be busy in the first quarter,” said Jonathan Calder, head of loan sales and trading at Citi. “We’re going to continue to make progress.”

And with progress, he added, we may see a shift in the market.

Consider this hypothesis: Not a whole lot of M&A deals are getting done, and a lag exists between the day an agreement is announced and the day the debt hits the leveraged loan and high yield bond markets. Meaning, even if everything were humming along fine right now, the deals announced today wouldn’t show up on the debt markets until the third quarter. So, if much of the overhang is worked through in the first quarter, say, dropping the total down to $80 billion, “We could go from what’s an oversupply environment to an undersupply environment,” Calder said.

Tom Newberry, head of the syndicated loan group at Credit Suisse, echoed Calder’s sentiment. “There’s a lot of talk, but deals aren’t closing,” he said, adding that many of the deals could peter out because of a lack of agreement on terms.

While it’s hard to imagine, with the condition the market’s been in for the last six months, that the advantage could once again tilt toward the seller, what they’re saying does make sense. And they are not the first to say it. Other bankers we’ve spoken to have pointed to the drowsy M&A market and the usual lag time.

Hopefully, however, the flow of deals will even out at some point during the year, creating a balance of power. Because too much yin, or yang, is never a good thing.

—CJC

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