Why merger and acquisition deals are vital for the primary market

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Oct. 20 2014, Updated 1:00 p.m. ET

What are leveraged loans?

Leveraged loans are undertaken by lower-rated borrowers. They’re rated BB+ and below by Standard & Poor’s. They’re commercial loans 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 is JPMorgan (or JPM).

Then, the loan is syndicated to other banks or institutional investors. Interest on leveraged loans is 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.

Primary market issuance in leveraged loans in the week ending October 10

There were 12 new issues amounting to $10.7 billion in the leveraged loans primary market in the week ending October 10. This was 35.5% lower than the previous week’s volumes. Issuance came in at $16.6 billion across 16 transactions in the previous week.

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Primary market conditions in the leveraged loans and junk bonds (JNK) (HYG) space were negative lately. This was due to a combination of higher prices and market volatility. The higher prices and market volatility were caused by higher risk perceptions. You’ll read more about the market conditions in leveraged loans in Part 8 of this series.

The forward transactions calendar fell from $47.5 billion to $42.2 billion week-over-week. The leveraged loan supply exceeded the demand. Demand had been lower. This was mainly due to the market factors mentioned above. Recently, supply spiked due to an increase in merger and acquisition-related issuance. The loan transactions for financing merger and acquisition activity are at $156 billion year-to-date (or YTD) in 2014.

Purpose of issuance

Acquisition-related issuance dominated last week. It accounted for six of the 12 deals during the week. There were three leveraged buyout (or LBO) transactions. The transactions were related to funding. Other issuers acquired loans to refinance older debt—two transactions—and for general corporate purposes—one deal.

In the next part in the series, you’ll read a detailed analysis of the major deals in the week ending October 10. The deals included loans by firms like Level 3 Communications (LVLT) and American Airlines (AAL).

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