The average bid for the 100 most actively traded loans in the secondary market has risen by about 40 percent in the past year, paving the way toward a more active primary lending market, as well as big paydays for those buyout firms that actively hunted discounted debt investments earlier this year.
Last month, the average bid for a leveraged loan listed on the SMi U.S. 100 loan index came in at 90.46 percent of par, up significantly from December 2008, when the fallout of the financial collapse led to an average bid of just 64.61 percent of par, according to Thomson Reuters LPC.
Enticed by the return potential of such steeply-discounted paper—and reticent to make new loans that would instantly trade at a discount to par—many lenders took to the sidelines in late 2008 to invest solely in the secondary loan market. That they did so contributed to a credit crunch that left many buyout firms on the sidelines for much of this year, unable to borrow money to finance their deals. But with spreads in the secondary market narrowing, lenders are expected to look to re-enter the primary market, where current pricing and terms could offer returns that are as, or more, attractive than those in the secondary market.
It’s also likely that a number of buyout shops will be able to return some money to investors. Faced in early 2008 with a flat-lining credit market and little deal flow, firms like