October 7, 2019 - Broadly syndicated loans to non-investment grade U.S. Corporations are widely misunderstood outside of the loan industry. A number of commentators imply that leveraged loans are shadowy corporate equivalents to pre-crisis sub-prime mortgages. This is clearly not true and, to respond to such conflations, the LSTA recently published a white paper (available here) addressing these views. Specifically, we:

• Define Broadly Syndicated Leveraged Loans as loans to U.S. companies that are rated non-investment grade, or below BBB-/Baa3 by the rating agencies. These loans are typically divided into a Revolver and an Institutional Term Loan, which is typically individually rated, and is priced and traded in the secondary market. These loans stand in contrast to direct loans, which typically are originated by one or a handful of non-bank lenders and are not typically priced, rated or traded.
• Explain the characteristics of the Institutional Investor base, which includes CLOs (51%), Loan Mutual Funds (11%) and Other Investors (38%).
• Discuss the risks in the leveraged loan market, critically differentiating between credit risk (the risk that a company fails to pay interest and principal when due) and systemic risk (the risk that adverse development of an asset or investment strategy can infect the financial system).
• Discuss the historical default rate on leveraged loans (approximately averaging 3% per annum) and on CLOs (negligible) and the recovery rate on loans (historically around 80 cents on the dollar).
• Debunk the perception of opacity in the loan and CLO market. Loans are typically individually rated by multiple rating agencies, they trade in the secondary market and most are “marked” on a daily basis by one of two pricing services. Trustees provide voluminous information on CLO portfolios to investors in CLO notes, and analytical firms such as Refinitiv LPC provide aggregated data on CLO portfolios to any subscriber. Information on ownership of CLO notes is available through regulatory filings, rating agency reports and the NAIC.

We believe that this white paper, which addresses common misperceptions in plain English, will be a useful resource for those not as familiar with the leveraged loan market. The white paper can be downloaded here. If members have questions, please contact mcoffey@lsta.org.