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Leveraged loans: Sponsors buy their own loans

Series of opportunistic buybacks is ruffling feathers in the loan market.

Boots: debt is back in the market

In a market as dysfunctional as the loan market still is, banks should be welcoming any new buyers with open arms. But some recent purchases have been raising hackles among syndicate banks because of the nature of the buyer: the borrower or sponsor itself. Several instances of this in recent months, such as Danish phone operator TDC’s purchase of €200 million of its own debt in March and private equity group PAI’s purchase of second-lien debt used to finance its own LBO of Lafarge, have highlighted what could become a growing point of contention in the loan market. Indeed, the trades have prompted the Loan Market Association itself to examine whether steps should be taken to address the practice. "We will have to look at standard documentation in light of what the market is doing," says Mike Johnstone, associate director at the LMA in Canary Wharf.

So why does it matter? The answer to this depends on whether the sponsor or the borrower is doing the buying.

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