Trading volume on the secondary market for large corporate loans soared last year, as loan growth and the entrance of new lenders and investors more than offset the withdrawal of Japanese banks.
By the end of the third quarter, the most recent period for which solid figures are available from Loan Pricing Corp., New York, more than $45 billion of par and distressed syndicated loans had changed hands in the secondary market, eclipsing the 1996 total of $41 billion.
And market observers said stellar growth in both investment-grade and leveraged loan markets could push the yearend total above $60 billion, for 50% growth from the previous year.
The advent of a secondary loan market during recent years has eased corporate America's access to credit by giving lenders an outlet for loans that complements the primary syndicated loan market, which turned in record volume of $1.09 trillion last year, according to Securities Data Co.
It also means greater efficiency because lenders and investors can now manage their loan portfolios by trading pieces of credits, much as they do in the bond and stock markets.
Commercial and investment banks now operate more than 20 loan trading desks, up from just seven in 1992.
And more new entrants are expected this year. Market sources said several European banks, including France's Societe Generale, are building loan trading desks. A spokeswoman for Societe Generale could not confirm the bank's plans by press time.
Helping to drive trading activity last year were nonbank investors in the loan market, including loan funds and insurance companies.
Growth in collateralized loan obligations "drove a lot of the buy side, particularly in the first nine months of the year," said Danise Longworth, vice president in loan distribution and trading at J.P. Morgan & Co. "We saw price levels get very heady on these term loans."
One of the year's most significant developments was the withdrawal from the market of Japanese banks, which are burdened by troubled loan portfolios at home.
"There was kind of a bullish tone to the market in the first three quarters, but from Thanksgiving to yearend, the secondary loan market was very soft, both in terms of volume and prices," said Robert Barmore, managing director at Harrison, N.Y.-based Meenan, McDevitt & Co., an investment banking boutique specializing in the sale and trading of commercial loans.
"The Japanese are basically gone," said Mr. Barmore. "If anything, the Japanese have been selling, not buying," he added.
The sudden departure of Japanese and other Asian financial companies is already relieving some of the pricing pressure that traders said was driving down spreads on leveraged loans in the secondary market.
"With the Japanese pulling out of the market, that's going to take enough supply of capital out of market to stem the tide and reverse the trend in spread compression for leveraged loans," said one market source.
Leveraged loans for media and telecommunications companies accounted for 40% or more of trading last year, said Ms. Longworth, and should continue to figure prominently this year.
The Loan Syndication and Trading Association, which is working to standardize operations in the syndications market, is close to completing a code of conduct for loan trading, according to chairwoman Allison Taylor, who is senior vice president for high-yield loan trading at ING Barings (U.S.) Securities Inc.
Among its projects, the association also expects to complete rules early this year that will permit legally binding trades to be made over the telephone, instead of on paper as is currently required.