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Debt products: Hybrids take root

The development of the simple syndicated loan into a more liquid security advanced a stage further this summer with two groundbreaking financings which arranger Donaldson Lufkin & Jenrette (DLJ) describes as bond/loan hybrids.

In leveraged loans for American companies, non-bank institutional investors now account for roughly 50% of lending, bankers estimate. Institutional investors - including prime-rate mutual funds, insurance companies and pension funds, special purpose vehicles for collateralized loan obligations and even cross-over junk-bond buyers - are all attracted to leveraged bank loans. As an asset class they offer high yields, the potential for some very modest price performance, low loss rates and strong security, with illiquidity the only traditional drawback. Even that is changing. Nearly $40 billion of leveraged loans are now traded, with dealers making markets in $5 million chunks and investors actively managing their portfolios.

European corporate treasurers, who have mixed feelings about the development of a secondary market in their bank loans, should take note of how American borrowers have embraced developments there. "Issuers are comfortable that the more new investors participate in loans, the better terms they will get," points out Harold Philipps, co-head of the senior debt group at DLJ.

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