Home >> Resources >> Blogs >> Market Insights >> Leveraged Lending Sees a Resurgence
30 Nov |
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| Over the last few months it appears that banks have begun to "actively" increase the number of leveraged loans being made to middle market and lower middle market companies. A leveraged loan is a loan provided to a company that already holds a considerable amount of debt. Because the borrower is already leveraged this type of loan carries more risk for investors. As a result, borrowers pay a higher interest rate in order to compensate for the higher risk of default or insolvency. "For the year or so banks have said they are lending, but only to conservative companies or investment grade credit. However, we have recently seen banks begin to make non-investment grade loans and re-enter the high yield market," says Richard Jackim, a Managing Director at MidCap Advisors. According to one report, in the third quarter, banks accounted for 35% of all leveraged loans issued. That's up more than three-fold from the first half 2010 levels and is almost back to 2001 levels when banks represented 45% of the market. According to Jackim, "the re-entry of the banks into the leveraged loan marketplace represents a significant shift in lending practices especially considering that banks have over $1 billion in excess reserves." There is no doubt that asset based lending (ABL) continues to be the main focus of most banks. However, part of the move to increase the number of leveraged loans they do may be the declining supply of ABL borrowers and the desire to capture higher returns. Many traditional asset based borrowers with strong cash flows are now choosing to access additional capital and pay higher interest rates. According to Moody's, the average spread over the three-month LIBOR rate for the most actively traded leveraged loans fell to 3.7 percentage points, from an all-time high of 11.12 percentage points in December 2008. That said, the majority of the lenders MidCap spoke with stated that leveraged loans are still reserved for the bank's larger established clients that have a good track record and solid balance sheets. This bodes well for companies seeking growth capital or acquisition financing. It also suggests a continued surge in M&A activity. If you would like to explore what this means for your company, please contact the MidCap Advisors office nearest you.
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