Securities underwriting a practitioners guide

Among other things, securitization distributes risk and permits investors to choose different levels of investment and risk. Mortgage loans mortgage notes are purchased from banks and other lenders, and possibly assigned to a special purpose vehicle SPV.

Securities underwriting a practitioners guide

What is a Leveraged Loan? A leveraged loan is a commercial loan provided to a borrower that has a non-investment grade rating, by a group of lenders.

It is first structured, arranged, and administered by one or several commercial or investment banks, known as arrangers. It is then sold or syndicated to other banks or institutional investors. Leveraged loans can also be referred to as senior secured credits.

We invite you to take a look. A good place to start? Defining "leveraged" Just what qualifies as a leveraged loan is a discussion of long standing. Some participants use a spread cut-off.

securities underwriting a practitioners guide

But what of loans that are not rated? At LCD we have developed a more complex definition. We include a loan in the leveraged universe if: How Big is the Leveraged Loan Market?

The size of the market, of course, depends largely on issuance. This appetite was prompted by continued expectations of rate hikes by the Fed, and by a steady rise in LIBOR, which buoyed yields on leveraged loans.

The reason is simple: Syndicated loans are less expensive and more efficient to administer than traditional bilateral — one company, one lender — credit lines.

Arrangers serve the time-honored investment-banking role of raising investor dollars for an issuer in need of capital. The issuer pays the arranger a fee for this service and, naturally, this fee increases with the complexity and riskiness of the loan.

By contrast, large, high-quality, investment-grade companies — those rated triple-B minus and higher — usually forego leveraged loans and pay little or no fee for a plain-vanilla loan, typically an unsecured revolving credit instrument that is used to provide support for short-term commercial paper borrowings or for working capital as opposed to a fully drawn loan used to fund an acquisition of another company.

In many cases, moreover, these highly rated borrowers will effectively syndicate a loan themselves, using the arranger simply to craft documents and administer the process.

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For a leveraged loan, the story is very different for the arranger. And by different we mean more lucrative. Seasoned leveraged issuers, in contrast, pay lower fees for re-financings and add-on transactions.

Because investment-grade loans are infrequently drawn down and, therefore, offer drastically lower yields, the ancillary business that banks hope to see is as important as the credit product in arranging such deals, especially because many acquisition-related financings for investment-grade companies are large, in relation to the pool of potential investors, which would consist solely of banks.

How are Loans Syndicated? Once the loan issuer borrower picks an arranging bank or banks and settles on a structure of the deal, the syndications process moves to the next phase.

Before formally offering a loan to these retail accounts, arrangers will often read the market by informally polling select investors to gauge appetite for the credit. Untilthis would have been all there is to it.

Once the pricing was set, it was set, except in the most extreme cases. If the loan were undersubscribed — if investor interest in the loan was less than the amount arrangers were looking to syndicate — the arrangers could very well be left above their desired hold level.

Market Flex is detailed in the following section. Market flex allows arrangers to change the pricing of the loan based on investor demand—in some cases within a predetermined range—as well as shift amounts between various tranches of a loan, as a standard feature of loan commitment letters.

Initially, arrangers invoked flex language to make loans more attractive to investors by hiking the spread or lowering the price. This was logical after the volatility introduced by the Russian debt debacle.

Over time, however, market-flex became a tool either to increase or decrease pricing of a loan, based on investor demand. Price flexes can be a good barometer of just how hot or cold the leveraged loan market is at any given time.

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Leveraged Loan Purposes For the most part, issuers undertake leveraged loans for four reasons: There are the three primary types of acquisition loans: The nature of the transaction will determine how highly it is leveraged.

Issuers with large, stable cash flows usually are able to support higher leverage.

securities underwriting a practitioners guide

Similarly, issuers in defensive, less-cyclical sectors are given more latitude than those in cyclical industry segments. Finally, the reputation of the private equity backer sponsor also plays a role, as does market liquidity the amount of institutional investor cash available.

Stronger markets usually allow for higher leverage; in weaker markets lenders want to keep leverage in check. There are three main types of LBO deals:This guide contains the details of over 5, databases or "systems of records" in which the US Government maintains information on individuals.

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