August 11, 2016 - August 10, 2016 – While the SNC Review (analyzed here) was the big news two weeks ago, we shouldn’t neglect last week’s release of the Federal Reserve’s 2Q16 Senior Loan Officer Opinion (SLOO) Survey. The big takeaways? First, on net, banks said they tightened terms in 2Q16 relative to 1Q16. And, second, relative to the last 11 years, overall loan terms are generally slightly easier, but “below investment grade” loan terms saw terms tighten (slightly). We detail the more interesting survey results below and compare them to what we see in the market.
First, a net 16.7% of large SLOO respondents said they tightened loan terms for large and MM companies in second quarter. Most of this tightening came in the leveraged space, with a net 19% saying they increased premiums on riskier loans. Why did the tighteners tighten? Respondents pointed toward a weaker economic outlook (83% said this was an important reason for tightening) and industry specific problems (67% flagged this as important). Interestingly – sort of – while 67% said regulatory pressures were unimportant, 25% said they were very important reason for tightening terms. Clearly the banks are bifurcated on regulatory pressures.
So, how do the SLOO results stack up relative to what we see in the market? Terms in the leveraged market were very challenging in first quarter, thanks to oil and gas concerns and low secondary prices. All-in spreads on B+/B rated institutional term loans jumped to nearly 70 bps to LIB+621 by the end of February, according to LCD. In contrast, terms seemed to ease a bit in second quarter – B+/B spreads contracted to LIB+506 in May – until Brexit briefly disrupted the party. And, most recently, terms have turned strongly in favor of issuers; TR-LPC noted that July reverse-flexes outnumbered upward ones by roughly 9:1.
The Fed also asked a special annual question: What are your current lending standards relative to the range that has prevailed between 2005 and now? This period comprises pre-crisis bull market, post-crisis bear market and the many fluctuations since. A net 17.5% of respondents said that overall syndicated lending terms are looser than the mid-point of standards. (TR-LPC does note that this is more conservative than the 2015 survey results.) However, in the below-investment grade category, a net 10% said terms were tighter than the mid-point.
So how does the survey on relative terms compare to what we see in the market? With the rise of covenant-lite loans, we believe we can safely say that covenants are looser than the 11-year mid-point. In addition, at 5.5x, leverage on LBOs is slightly above the straight average of 5.2x since 2005. (Caveat: The few LBO deals in 2008-2010 probably bring the straight average down considerably; on a weighted average basis, we may still be below the mid-point.) And at LIB+522 in 2Q16, average all-in spreads remain materially wider than the average since 2005 (LIB+485).
All that said, the regulators may have the last word. According to the SNC Review, banks basically are no longer originating non-pass credits. So, while only a net 10% of bankers said leveraged loan terms were tighter than the midpoint, the riskiest end of the credit tail appears to have been chopped off.