"Real call protection" is "one of the biggest missing pieces of the loan market," according to a Bank of America Merrill Lynch banker who syndicates leveraged buyout loans.
This week the investment bank arranged a $2.2 billion loan package for Kinetic Concepts' buyout. The borrower cannot call any of the loans during the first year.
This feature was a big help, particularly in marketing the paper to high-yield bond investors, said Robert Schleusner, managing director and co-head of leveraged finance at Bank of America Merrill Lynch.
Schleusner spoke at the Loan Syndications and Trading Association's annual conference in New York on Wednesday.
The Kinetic loan package was an imperfect test case for the strategy of carving out short-dated tranches to syndicate loans to maturing collateralized loan obligations, Schleusner said.
Bank of America Merrill Lynch had "some success" by carving out a $325 million five-year tranche, he said. "But I'm sure there were some guys [CLO managers] who could've done it if they liked the credit." (Kinetic is rated BB-plus by Standard & Poor's and Ba2 by Moody's Investors Service.)
CLOs are still the biggest loan investors, holding roughly half of the $500 billion of outstanding paper.
But most CLOs were issued in 2005 and 2006 and are nearing the end of their reinvestment periods, making it difficult for them to buy seven-year loans.
