Howard Tiffen has always had something to say about the loan market. But these days, he has an audience.
As manager of the $1.6 billion Pilgrim America Prime Rate Trust, the oldest mutual fund that invests exclusively in bank loans, Mr. Tiffen's views are increasingly being sought by the industry's largest underwriters.
Lenders "call us up and ask us questions," Mr. Tiffen said. "The discussion is, 'How can we structure this deal?'"
He contrasts that with two years ago, when lenders approached him with a "take it or leave it" attitude about their deals.
The shift came as troubled Japanese banks stopped buying pieces of U.S. loans, leaving institutional investors such as Mr. Tiffen to pick up the slack. Suddenly, he and his fellow loan buyers were attracting attention, giving them a platform from which to air their views.
In an interview during a two-day media tour of New York this week, Mr. Tiffen said the loan market is healthy and that concerns about credit quality have been overstated.
He said, however, that big commercial banks could be doing more to serve the investors on which they now depend. He called on them to adjust their approaches to originating and buying loans.
When buying loans, banks need to be less relationship-driven, Mr. Tiffen said.
"I still hear a lot of banks saying we won't do that deal or that deal because we don't have a relationship," he said. "Well, we don't care about relationships. That makes us fundamentally different."
On the originations side, Mr. Tiffen said he is particularly worried about how big-bank lenders handle "the work0out"-the period after a loan closes and the borrower begins to pay down the debt.
"Commercial banks, for all that they say about credit culture and lending alongside the ultimate investors like ourselves, really don't have a monopoly on being able to run workouts better than anyone else," Mr. Tiffen said. "There are people at Goldman and DLJ who will call me monthly even if there's nothing to report. I can't even get some other bankers on the phone."
Mr. Tiffen also is concerned about a recent development in loan underwriting by investment banks. These banks began selling loans considered "senior"-meaning they would be paid first-but were "unsecured"- meaning they were not backed by assets.
The trend first appeared about three months ago when the high-yield bond market began to show stress and subordinated debt was harder to sell. The loans were cheaper for borrowers. But Mr. Tiffen said the risk was not worth the returns.
"At the end of the credit cycle it could become dangerous," he said, "and they thought we wouldn't argue about it."
Instead, Mr. Tiffen let his opinion be known the way he has for years: by not buying.
"The investment banks were saying, here's a way for us to give a price break to issuers and still get the stuff sold. We stay away from it."
Mr. Tiffen's experience as a loan investor is unmatched. Launched in May 1988, the Pilgrim fund is the oldest among the 14 mutual funds that now invest exclusively in corporate loans. It is the only fund of its kind to carry a four-star rating from Morningstar Inc.
Pilgrim's cumulative return since inception is the highest among its peers, at 126.46% through May 31. The fund's one-year return of 8.83% is a full percentage point higher than its closest competitor.
Most recently, the closed-end fund was the first of its kind to gain permission to issue shares without applying to the Securities and Exchange Commission, giving Pilgrim and Mr. Tiffen more control over the fund's cash flow.
The success of the Pilgrim fund-as well as that of rival funds run by Van Kampen American Capital, Eaton Vance Capital Management, and others- suggests to Mr. Tiffen that investors will continue to look for the interest rate protection found in loan funds.
"The sales pace has been picking up," he said. "I think brokers are beginning to understand that the asset class works."
