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Capital Markets

Leveraged finance: Leveraged finance goes from bad to worse

Far from turning a corner in 2008, the market looks set for a few tough months yet.

"January is going to be a horrific month for losses," said a leveraged finance banker at the end of the month. "In December all I was hearing was that in the New Year everyone would have new budgets and new lines, and everything would be OK. But people are now finally waking up to the fact that things are going to be miserable in this market for some time to come."

The market remains plagued by the dual problems of the hung pipeline and the evaporation of the institutional bid for leveraged loans. As each month passes, the pressure on bank balance sheets continues to grow and there is a sense that the situation must come to a head soon. Forced selling has begun, but is just contributing to further price declines. According to Standard & Poor’s Leveraged Commentary and Data, the average loan spread at the beginning of February was 535 basis points over Libor – which is a full 295bp above its traditional 240bp level. S&P concludes – not surprisingly – that spreads now offer a true margin of safety over and above default risk even if there is a severe macroeconomic downturn.

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