ING’s Joyner: Leverage loan market margins higher now than six months ago

By Rebekah Tunstead | 29 January 2019

“If you look at the leverage market let’s say ‘correction’, margins are higher now than they were six months ago,” says Dafydd Joyner, director of syndicated finance at ING bank.

“There is not a huge amount of deals out there, you’ve got three or four deals out there. Whether they are a new issuer or an existing issuer, they are looking like they will clear at 425 over, which is 50 basis points wider than the same deal back in November, or October,” he says.

However, investors are showing signs of caution in the market.

“There is a little bit more discipline around margin, but margin in the leverage market is quite dependent on supply and demand,” says Joyner.

“There are a fair few auctions not going through because the sellers want more than buyers. The more concerns you have about the economy and the business’s ability to grow, you will have difference in valuation multiples.

“One thing we have focused on is whether standards for larger deals are applied on smaller deals. Of course, larger deals by definition - bigger is better when it comes to companies. You do have sponsors who achieve terms for larger deals and then they do a deal a third of the size and they want the same terms for the smaller deal,” says Joyner.

“If there was a market downturn, it’s no secret that smaller deals would be hurt first. It’s about making sure that you’re disciplined about lending standards around smaller deals rather than larger deals.

In analysis published January 25, the Bank of England pointed out most market analysts believe there to be around $1.3trn in outstanding leveraged loans. That figure doesn’t include smaller and less liquid loans, according to the central bank, which, when included force the global figure to reach $2.2trn.

On the same day, the US Federal Reserve published a review which stated that although “the risk in the portfolio of large syndicated bank loans had declined,” the “dollar volume of loans rated below ‘pass,’ as a percentage of total loans, remains elevated compared with levels experienced in prior economic cycles.”

Leveraged finance, according to the Bank of International Settlement (BIS) has doubled since the financial crisis.

In May 2017, the ECB published leveraged lending guidelines in order to monitor “both syndication risk and the fundamental credit quality of leveraged exposures.”

The interpretive nature of the guidelines has led to debates within banks, says Joyner.

“The guidelines do leave things open to interpretation for every bank. They are guidelines, they are not rules which in the long run I think is probably a good thing because you can set rules people can structure around them, so the guidelines are a bit more high level.

“There can be a guideline where you think I’m not entirely sure they mean this but if I adhere to the guideline in my way, I’m confident if the regulator came to ask me, ‘why did you do it like this?’ I have very good reasons why I did it.

“Could the regulators do anymore? I mean you could be fined for doing deals outside of the guidelines. But, you can’t be too prescriptive,” says Joyner.

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