In many cases, moreover, these highly rated borrowers will effectively syndicate a loan themselves, using the arranger simply to craft documents and administer the process.įor a leveraged loan, the story is very different for the arranger. Struck during the loan market’s formative days, the RJR deal relied on some $16.7B in loan debt.īy contrast, large, high-quality, investment-grade companies-those rated triple-B minus and higher-usually forego leveraged loans and pay little or no fee for a plain-vanilla loan, typically an unsecured revolving credit instrument that is used to provide support for short-term commercial paper borrowings or for working capital (as opposed to a fully drawn loan used to fund an acquisition of another company). KKR’s $25B acquisition of RJR Nabisco was the first-and remains the most (in)famous-of the high-flying LBOs. The issuer pays the arranger a fee for this service and, naturally, this fee increases with the complexity and riskiness of the loan.Īs a result, the most profitable loans are those to leveraged borrowers-those whose credit ratings are speculative grade (traditionally double-B plus and lower), and who are paying spreads (premiums above LIBOR or another base rate) sufficient to attract the interest of nonbank term loan investors, (that spread typically will be LIBOR+200 or higher, though this threshold rises and falls, depending on market conditions). The reason is simple: Syndicated loans are less expensive and more efficient to administer than traditional bilateral-one company, one lender-credit lines.Īrrangers serve the time-honored investment-banking role of raising investor dollars for an issuer in need of capital. Starting with the large leveraged buyout (LBO) loans of the mid-1980s, the leveraged/syndicated loan market has become the dominant way for corporate borrowers (issuers) to tap banks and other institutional capital providers for loans.
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