Providing fresh evidence that the bond and loan markets are converging, Standard & Poor's says its bank loan rating system is beginning to flourish.
The agency has evaluated some 64 bank loans since July 1. Thirty-three of those ratings were issued during November and December - three more than the 31 bank loan ratings Standard & Poor's made public during the previous four months.
The increase underscores efforts by commercial banks and their corporate customers to cater to the growing number of institutional investors who want a piece of the bank loan syndication market. Standard & Poor's ratings, which are issued only at the request of borrowers and bankers, are used by the investor community to evaluate debt.
"We're at a point in the business cycle where there's a lot more investment dollars chasing the issuers," said Steven Bavaria, Standard & Poor's head of new product development. "The corporate investor has his pick of the public, private placement, and bank loan markets."
Moody's Investors Service also rates syndicated bank debt. But unlike S&P, it evaluates loans whether it is invited to do so or not.
Many borrowers had little or no interest in bank loan ratings when they were introduced a year and a half ago. But Mr. Bavaria said he has been "delighted and surprised at the interest" the ratings have attracted since September.
The ratings' popularity has soared in conjunction with institutional investors appetite for bank debt. According to Loan Pricing Corp., institutional tranches of syndicated bank loans, known as B/C/C/ paper, totaled $9.73 billion at the end of the third quarter. That's more than the $7.63 billion in institutional tranches issued all of last year.
Another $2 billion is expected from fourth-quarter institutional tranches, according to Loan Pricing.
"The bank debt market is behaving more similarly to the high-yield bond market than ever before," said Michael Rushmore, vice president and head of loan syndications and trading research at BankAmerica's BA Securities Inc.
"There's no question that institutional investors are crossing over more and more into the loan markets," added Steve Miller of Leveraged Analytics, an analyst active in the bank loan market.
So-called 'crossover investors' - those that buy both high-yield bonds and leveraged bank loans - are now finding it easier to balance their high- yield portfolios by snatching up fixed-rate bonds, private placements, and floating rate syndicated paper, market participants said.
In addition to bank loan ratings issued by S&P and Moodys, a process known as relative value analysis is becoming increasingly common. This type of analysis lets institutional investors compare bond and loan yields on equal footing.
Using relative value analysis, for example, investors can compare bonds and loans by using either a yield equivalent to the London interbank offered rate or a bond equivalent yield-to-maturity.
High liquidity in the bank loan market and the growing trading operations of commercial banks have also motivated crossover investing, industry participants said.
"Assignment and participation is a lot easier now than a couple years ago," said Charles Kobayashi, vice president of Orix USA Corp., a typical crossover investor with approximately $1 billion in both high-yield bonds and leveraged loans.
But this year's boom in crossover investing has its downside, he said. As demand grows, allocations are increasingly tougher to get and pricing of the issues gets tighter.
"That worries me a bit," Mr. Kobayashi said.
