Loan Market Overview

In Europe, banks have historically dominated the debt markets because of the intrinsically regional nature of the arena. Regional banks have traditionally funded local and regional enterprises because they are familiar with regional issuers and can fund the local currency. Since the was formed in 1998, the growth of the European leveraged loan market has been fuelled by the efficiency provided by this single currency as well as an overall growth in & acquisition (M&A) activity, particularly leveraged buyouts due to private equity activity. Regional barriers (and sensitivities toward consolidation across borders) have fallen, economies have grown and the euro has helped to bridge currency gaps.

The retail market for a syndicated loan consists of banks and, in the case of leveraged transactions, and The balance of power among these different investor groups is different in the U.S. than in Europe. The U.S. has a capital market where pricing is linked to credit quality and institutional investor appetite. In Europe, although institutional investors have increased their market presence over the past decade, banks remain a key part of the market. Consequently, pricing is not fully driven by capital market forces.

In the U.S., market flex language drives initial pricing levels. Before formally launching a loan to these retail accounts, arrangers will often get a market read by informally polling select investors to gauge their appetite for the credit. After this market read, the arrangers will launch the deal at a spread and fee that it thinks will clear the market. Until 1998, this would have been it. Once the pricing, or the initial spread over a base rate which is usually LIBOR, was set, it was set, except in the most extreme cases. If the loans were undersubscribed, the arrangers could very well be left above their desired hold level. Since the roiled the market, however, arrangers have adopted market-flex language, which allows them to change the pricing of the loan based on investor demand—in some cases within a predetermined range—and to shift amounts between various of a loan, as a standard feature of loan commitment letters.