Livingston's Cerebral Guide to the Corporate Loan Market

The corporate loan market is here explained by Livingston in no particular order.

Investment Grade versus Leveraged Loans

The "investment grade" loan market is the "golden child" of the loan market. It comprises loans to companies rated >= BBB/Baa3 with relatively low spread to LIBOR. Nothing very exciting - these are solid companies, with strong credit ratings that can finance themselves relatively cheaply.

The "leveraged loans" market, on the other hand, is a different kettle of fish. Here we deal with companies with weaker credit ratings and spread >= LIBOR + 150bps.

Side note: leveraged loans are also used in leveraged buyouts (LBOs) of companies.

Institutional Loans

Loans structured for sale to institutional investors, e.g. mutual funds, hedge funds, insurance companies, CLOs (where loans are pooled together, requires deeper explanation (later)).

Secondary Loans / Secondary Market

A secondary loan market is one in which loans trade after primary syndication completes - mostly this involves leveraged loans.

The area of banks that are dedicated to bringing these loans to the market is called loan underwriting/syndication. From the league table perspective, this has a jargon all of its own.

* Lead left - only lead bank on a transaction
* Lead bookrunner / Lead arranger - top 1 or 2 banks in the transaction (called left and right)
* (Titled) Agent - usually lead arranger
* Co-agent - involved but not from the earliest stages

Role of the Revolver

Both investment grade and leveraged loans generally involve some sort of revolver. It offers flexible financing for corporations.  With an RCF- as its sometimes known (the F stands for "facility") , the loan can be repaid and redrawn. Revolving credit is generally linked to LIBOR.

CLO

With a CLO, you pool together a bunch of loans. The payments of these loans are passed on to the owners of various tranches of the CLO. CLOs are an instrument of syndication - it's basically creating debt for companies, packaging that debt into a "marketable" format for willing investors, thus lowering the cost of capital the company.