The New Loan Market: High Yield Bonds

It’s not that we don’t all love a good bank loan. They’re so, you know, secure. (Or they should be.) But evidence is mounting that leveraged loans are also, like, sooooooo 2006.

But you don’t have to take my word for it—take the chart’s. You can check it out below. I’d been chatting with John Ong about his new gig as head of debt capital markets at Sunrise Securities—a profile also on—and he’d explained how Sunrise, in starting its new DCM group, was betting the leveraged loan market won’t rebound any time soon.

The firm, and they aren’t the only ones, believes leveraged loan volume will remain well below its buyout boom peak and that other products such as junk bonds and equity will step in to fill the void. So I went in search of data and found a nifty little chart, provided by Standard & Poor’s LCD, which seems to prove Sunrise and others like them right.

While it varied from year to year, for most years between 1997 and 2004 high yield bonds made up 30-something or close to 40 percent of leveraged lending volume. But during these years, banks began syndicating larger and larger pieces of leveraged loans. And by 2005 to 2007, the syndicated piece of the loan market had grown to roughly half the volume, and the bond piece had shrunk to just over 20 percent.

Then, the loan buyers went away. And what we have now, so far this year, is a junk bond market that makes up more than half of leveraged volume, while the syndicated portion of the loan market makes up only 10%.

This isn’t all that surprising, considering the issuance we’re seeing, but it does strike you when you see it laid out in a nifty little chart. The more anecdotal proof of the issuance is coming at us everyday. It’s Thursday afternoon, and for two days I’ve been watching the parade of issuers step up to the high yield primary plate.

Six new companies joined the queue this morning, and now three of those have priced, as did four issuers that announced deals yesterday. In all, nearly $5 billion in high yield bond deals—some public, some 144a—have come to market in a 48-hour period. And a few more are expected for Friday and Monday.

The completed issues include a $900 million deal for CCC-rated Ford Motor Co., led by JPMorgan; a $1.05 billion deal for Cricket Communications, led by Goldman Sachs; and a $1.3 million deal for CCC-rated Harrah’s Escrow, led by Banc of America Securities. Ford did price its 8% senior secured notes with a pretty hefty 82.04 OID. But just a couple of months ago, investors were saying the market had no stomach for CCC-rated companies at all.

Of course, things can always change. But if I’m proven wrong, I’ll blame the chart.

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