Though the leveraged loan market continues to grow and merge with the high-yield bond market, barriers to their full convergence remain, according to a new report.
The growth of so-called hybrid loans that carry longer terms and use bond-like features, such as call protection, will continue.
But basic distinctions like the floating rates of loans, as opposed to the fixed rates found on bonds, are key differences between the markets that will not disappear, according to the report from the loan syndication and trading research group of BancAmerica Securities Inc.
"As interesting and innovative as the hybrid structures are, we're just taking a loan product and making it look, taste, and smell very much like a high-yield product," said Steven D. Oldham, author of the report.
Real differences between leveraged loans, those priced at least 125 basis points over the London interbank offered rate, and high-yield bonds will remain because they benefit both investors and issuers, he said.
For debt issuers, the ability of underwriters to do several parts of a financing in a "one-stop-shopping" deal gives them "the opportunity to survey the leveraged loan and high-yield bond markets in search of the best mix," wrote Mr. Oldham.
And recent hybrids, such as Donaldson, Lufkin & Jenrette's $300 million loan and bond acquisition financing for chemical company Pioneer Americas, let investors compare the relative value of loans and bonds for the same deal and pick the instrument that best meets their needs.
But the continued convergence of the two markets hinges on the strength of the economy.
A robust economy and low loan default rates have attracted record numbers of nonbank investors to the leveraged loan market. But a downturn and rise in defaults could drive many of them out, "allowing commercial banks to recapture the bulk of their acquisition finance franchises," according to the report.
But some in the market see no permanent boundaries between bonds and loans.
"Everything's up for grabs - collateral, seniority, fixed versus floating interest rates. I think all the traditional lines between bank loans and high yield have been blurred," said James M. Karp, vice president and syndicate manager in the bank loan group of Goldman, Sachs & Co.