Market turmoil reverberated through the syndicated loan market in the third quarter, though the episode was far less severe than the chaos of 2008.
Now, dollar-funding shortages at European banks are adding another dimension to the tumult that could cut both ways for domestic banks. A pullback by the competition could mean better pricing, but a withdrawal of liquidity could also make it harder to get deals done.
Yields on leveraged loans jumped 130 basis points from the second quarter to 7.3% in the third quarter and issuance slumped 40% to $96 billion, according to data from Thomson Reuters LPC.
But the amount funded by deposit-rich banks was roughly stable at about $65 billion as the proportion of deals taken down by institutional investors continued to fall (see charts). Meanwhile, intense competition among banks helped keep loan spreads for investment-grade borrowers flat and issuance strong.
Overall, dislocations in the syndicated loan market appear to represent sympathetic tremors emanating from broader financial disorder, rather than the fundamental breakdown that took hold during the height of the financial crisis, according to analysts at Thomson Reuters LPC.
Default rates for leveraged loans remain low, and there is less to go wrong: the pipeline of debt to be placed with nonbank investors stood at about $13 billion in September, compared with about $125 billion at the beginning of 2008.
Moreover, structured investment vehicles, a class of investors that proved vulnerable and immolated in a spiral of fire sales, have never fully reconstituted.
Still, as long as financial conditions remain unsettled and rates stay high, Frances Beyers, an analyst at Thomson Reuters LPC, said she expects leveraged loan activity to slump further.
In the investment-grade universe, thin spreads have meant that the economics of lending has always depended on cultivating relationships with borrowers that involve other revenue streams.
Beyers said she expects that funding problems European banks have encountered will cause them to be even more scrupulous about reserving their balance sheets for core customers, pushing rates higher.
That would translate into better terms for U.S. lenders, but greater anxiety over placing debt.
Amy Carlson, head of the debt capital markets group at KeyCorp, said that many clients have large funding needs.
"They're international. They have a lot of businesses to support," she said. "It does get hard for our clients to figure out: Who's in our bank group? Who can help me in Asia? Who can help me in Europe?"
Beyers said, "At the end of the day you still want to have a liquid market."