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Relationships take edge off price rises

At the start of the year Lucine Kirchhoff took a bold position. The price of high-grade loans, she said, was destined to increase: "Look for investors to focus more on drawn pricing to compensate for the appropriate risk they are taking," said Kirchhoff, the head of loan syndicate at Banc of America Securities. It would be a similar story for undrawn costs. Higher pricing ought to have been inevitable given the recession, a rise in defaults, rating-agency downgrades and fallen angels, and the uncovering of corporate frauds. Banks would surely be looking for a much better return for the risks they were taking, which would imply a wholesale change in prices rather than just a slight increase.

On a percentage basis this has happened. In July AOL was forced to pay an interest rate for its undrawn 364 revolver that was 31% higher than the rate it agreed to the previous year. It might seem a large increase in percentage terms but it amounted to just 2.5 basis points, taking the rate from 8bp to 10.5bp over Libor.

This wasn't what Kirchhoff had in mind. "While most pricing levels are higher than last year, pricing has drifted up slowly rather than spiking as some of us had expected," she says now.

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