DIPs and Amendments: The New Primary?

I snagged that headline straight from the title of a session this morning at the Loan Syndications and Trading Association’s “Navigating the Distressed Leveraged Loan Market” conference. Interesting how things change. At LSTA’s annual conference in October 2007, the primary market panel was dubbed “Challenges For Borrowers: The New Look of the Primary Market.”

I remember that panel, mainly because I wrote about it, and I remember the bankers on it valiantly holding onto their optimism, despite signs that the economy and the loan market were deteriorating. Still, even with the early signs, no one at that point would ever have guessed the title of today’s session. Hell, one of those bankers worked at a place called Bear Stearns.

The panel this morning didn’t really answer the question of whether DIPs and amendments are the new primary. But then, they probably didn’t have to. Despite some positive signs recently—new deals that haven’t been DIPs, improvements in secondary pricing and some juicy returns—the leveraged loan market still has a long way to go to recovery. And DIPs and amendments have been this season’s black.

And we are likely to see more of them, according to the panel. Though seeing more DIPs isn’t necessarily a bad thing. As panelist Scott Page of Eaton Vance put it, “DIPs are among the most attractive pieces of paper out there. I’m mystified by the lack of interest by banks of all kinds.”

Page puts his money where his mouth is, adding that Eaton Vance is raising money for a DIP-focused fund.

Douglas Antonacci, head of U.S. distribution at JPMorgan, said DIPs are seeing returns from the low teens to the 20s, depending on the size and sector. And banks, while they have been internally focused and not falling over themselves to underwrite these loans, as has been the case historically, they will start jumping in soon, he predicts.

“If you talk to the buyside, they want DIPs,” Antonacci said. The buyside wants to get things done, and if a DIP needs to happen to get the capital structure into shape, then investors are for it, he said.

Antonacci and Page were joined on the panel by William Chew of Standard & Poor’s. And on a gossipy side note: Mike Mauer, who was supposed to fill seat number four, did not make the session. The former head of leveraged syndications at Citigroup officially left the firm for Icahn Investment Management just two days before the conference (LFN, May 13, 2009). The session went off fine with just three speakers and a moderator, however, meaning that as the fourth guy on the panel he wasn’t really missed. As the head of Citi’s leveraged syndications and origination effort, one probably can’t say the same.

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