
Generally, broadly syndicated loans have more lenient covenants than other types of loans. For example, eighty percent of broadly syndicated loans are “saratoga” loans, which do not impose minimum annual cash flow requirements. This reflects more lenient market conditions than traditional loans, which often require a minimum cash flow requirement.
Leveraged loans
Leveraged loans are broadly syndicated debt instruments issued by financial institutions to non-investment grade companies. These loans can be used for general corporate purposes, such as refinancing existing debt, recapitalization, and leveraged buyouts. Leveraged loans have several advantages over non-leveraged loans.
The total leveraged loan market is just under $2 trillion, with $1.3 trillion of that total held by institutional lenders. Leverage levels are steadily creeping higher. Most leveraged transactions have a total leverage of 5.5 times, with 4.6 times coming from first lien loans. This level has continued to increase in recent years, and the highest twenty percent of leveraged borrowers have leverages of at least 6.25 times.
Leveraged loans have several risks associated with them. For one, covenant-lite loans lack an early warning mechanism and prevent lenders from re-assessing loans before they default. Another risk associated with these loans is regulatory capital arbitrage. This practice allows institutions to manipulate risk by lowering their capital requirements. Furthermore, increased competition among ratings agencies creates rating shopping and raises questions about the accuracy of leveraged loan ratings. As a result, it is hard to assess the health of the leveraged loan market.
Leveraged loans have been growing steadily since their inception. Today, they constitute a large portion of the loan market, with the total size of leveraged loans exceeding $1tn. As a result, they are a significant contributor to the funding needs of private companies.
Syndicated loans typically involve large sums of money and are offered by multiple financial institutions, thereby spreading the risk of default among several financial institutions. In addition, syndicated loans often have a lead bank that puts up a larger share of the loan and performs administrative tasks. These administrative tasks can take up a large portion of staff time, and most lead banks invest in loan administration software to help ease the workload and increase accuracy.
Free-and-clear tranches
Free-and-clear tranches are a relatively new innovation in broadly syndicated loans. They emerged from the proliferation of covenant-lite loans in the market. Lenders expect their use of free-and-clear tranches to fluctuate with market conditions.
CLOs
CLOs, or collateralized loan obligations, are complex structures that combine several elements in order to provide investors with an above-average return on investment. These instruments are made up of several tranches of underlying loans, which are then ranked according to risk. Though some CLO tranches are leveraged and below investment grade, most are rated investment grade and benefit from diversification, credit enhancement, and subordination of cash flows.
The risk associated with CLOs increases as they become larger and represent a higher percentage of the total debt structure. For instance, $10 million of senior secured loans is more likely to be fully covered in bankruptcy than $90 million. Another factor is the industry segment in which the CLO is issued. Some industries go in and out of favor, while others remain highly desirable.
Broadly syndicated loans are generally backed by cash flows and are typically used to finance acquisitions, mergers, and recapitalizations. They are among the most common leveraged bank loans, and are also the most common type of collateralized loan obligation. The market for these instruments is dominated by banks, securities firms, and institutional investors.
Fees associated with CLOs vary. While most lenders receive a percentage of the final allocation, some pay a fixed upfront fee. Typically, this fee is between 12.5 bps and 25 bps. However, this fee can be tied to the commitment of the investor.
A key part of CLO management is overseeing cash flows. This is important because the cash flows of CLOs are distributed through a multi-tranche structure. Each tranche has its own unique set of covenants that require the manager to monitor and test the performance of the portfolio monthly. Using these covenants, the manager can adjust the portfolio as the market changes.
Revolver
Revolver broadly syndicated loans are a type of secured loan that a borrower may take out to fund a business operation. These loans are secured by the company’s assets, such as accounts receivable and inventory. Typically, the borrower takes out a 1st lien on the asset used to calculate the amount of the loan, and can also include other assets as collateral.
These loans are structured to allow borrowers to draw down on the credit line, repay it, and then draw more money off the line. The borrower is then charged an annual fee for any unused amounts. Revolver broadly syndicated loans are most commonly offered to institutional investors, such as pension funds, mutual funds, insurance companies, and hedge funds.