What are leveraged loans?
Leveraged loans are commercial loans. They’re provided by a group of lenders. The loan is usually secured. It’s structured, arranged, and administered by investment and commercial banks—the arrangers. An example of an arranger is JPMorgan (JPM). Then, the loan is syndicated to other banks or institutional investors. Interest rates on leveraged loans are usually paid at or above LIBOR + 1.25%. The Invesco PowerShares Senior Loan Portfolio (BKLN) is an example of an exchange-traded fund (or ETF) that mainly invests in leveraged loans.
Comparing leveraged loans and high-yield debt
Both high-yield debt and leveraged loan issuers are rated below-investment grade. Below investment-grade debt implies a credit rating of BB+ or below. While high-yield debt (or JNK) usually pays a fixed rate of interest, the interest rate on leveraged loans is floating rate. High-yield debt is also usually unsecured—unlike leveraged loans.
Primary market issuance in leveraged loans in the week ending September 12
Two new issues, amounting to $655 million, were allocated in the leveraged loans primary market in the week ending September 12. Issuance had been thin lately. This is a result of the August slowdown in investment-banking activity. Recent market corrections in the high-yield and leveraged loans market were also responsible for keeping issuers at bay.
The deals in the week included:
- ABRA Auto Body & Glass came up with a $405 million financing package. The proceeds are earmarked for Hellman & Friedman’s leveraged buyout from Palladium Equity Partners.
- ClubCorp (or MYCC) issued $250 million in additional senior secured loans to its existing term-loan facility. MYCC’s deal is expected to close around September 30—concurrent with the company’s purchase of Sequoia Golf.
Forward deal book is strong
New issuance was very weak compared to historical standards. However, at least 25 new transactions were launched. The forward calendar for leveraged loans stood at ~$60 billion. ~$49 billion of upcoming deals pertain to merger and acquisition-related activity. The deals include Burger King’s (BKW) upcoming buyout of Canadian chain, Tim Hortons (THI). The deals also include Scientific Games’ (SGMS) term loan. It will be used to partially finance the company’s $5.1 billion acquisition of Bally Technologies.
In the next part of the series, you’ll read more about the primary and secondary market activity in leveraged loans.
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