Fire sale becomes the new order
Banks are heavily discounting syndicated loans for relationship reasons and taking a double hit when they hedge their risks with more realistically priced credit swaps.
AT&T, ConocoPhillips and AOL: three companies, three loans,
NO BANK EXPECTS to get paid 700 basis points for taking on a chunk of an investment-grade loan. Yet that is precisely what happened for some lucky participants in AT&T's $4 billion 364-day revolving credit completed at the start of October.
It wasn't planned that way. It started out as a bog-standard deal for a relatively solid triple-B credit. Upfront fees were 100bp over Libor, and only then for the four lead arrangers that had committed $550 million each at the start of the process. That had been increased from 87.5bp over after rumours of AT&T being downgraded a notch. The seven other banks acting as co-arrangers were paid 75bp or 62.5 bp over Libor depending on whether they committed $300 million or $200 million.
So far so good. But then at the start of September the general syndication process began, used by the 11 lead and co-arrangers to sell down their initial positions to a broader group of banks, known as the retail portion of the syndicate.