That flapping noise in the syndicated loan market is the sound of investors flying toward quality loans.
As the stock market swoons, prices for senior secured loans are holding steady in secondary markets, bankers and analysts report, but new high- yield loans may be shelved until financial markets stabilize.
The shake-up in the syndicated loan market comes as investors look to fill their portfolios with debt that companies have promised to pay first in times of financial distress, such as an economic downturn or, at worst, bankruptcy.
The move toward quality has come at the expense of those leveraged loans considered less likely to be repaid-senior unsecured and all subordinated debt. Price quotes for those credits are down one-quarter to one-half point from the original price of the loan.
Michael Rushmore, an analyst at BankAmerica Corp., said that even with a slight devaluation leveraged bank loans have held their value far better than other high-yield debt instruments.
"We have investors who are viewing a one-quarter to one-half dip in prices as a buying opportunity," he said. "Investors in the bank loan market are remaining very active."
Retail investors seem to agree. The net asset values of stock and bond mutual funds have tumbled, but most loan-participation funds, which invest primarily in leveraged loans, have held their value or fallen less than half a percentage point since the stock market's record high on July 17.
Quality loans also are gaining ground from the high-yield bond market where prices on existing bonds have dived. In turn, new credits have become more expensive for issuers because investors want a better yield in return for growing risk.
"As investors look to reduce risk exposures, it will be difficult for the most active high-yield loans" to trade or be originated, said Sean C. Keenan, a loan analyst at Moody's Investors Service. "But the loan market will also capture issuers who lose the option of other capital markets," especially high-yield bonds.
Mr. Keenan said Moody's does not expect to issue an unusually high level of downgradings for existing loans. But he added that overall credit quality would suffer if an economic downturn is worse than economists predict.
Bruce W. Ling, head of syndicated finance at Credit Suisse First Boston, said underwriters are likely to be far more cautious in making credit decisions during the second half.
A careful approach may mean less leveraged volume for lenders. But with leveraged lending at a record $152 billion through the first half, many lenders do not want to sour an otherwise great business year with deals getting stuck in syndication.
"People are taking a second look at everything," Mr. Ling said.
"Nobody wants to make any mistakes. In peacetime, so to speak, no one would give these credits a second look, and they would have sailed out the door."