September 11, 2020 - This week, the LSTA, together with Fitch Ratings, held the first of a three part Lunch and Learn series, “The Differences between Loans and Bonds: Are loans Distinct? The Lunch and Learn session was moderated by LSTA VP of Market Analytics and Strategy, Kenny Riaz, and featured resident LSTA loan experts Elliot Ganz and Ted Basta. The panel provided insights on the distinctions between high yield bonds and loans, focusing on the structural aspects, market fundamentals and technicals, along with key asset performance expectations to answer the question, “Are loans distinct?”
Mr. Basta covered the market side and Mr. Ganz the legal side of the question. On the structural market differences, loans are senior secured, floating rate, placed at the top of the capital structure, while high yield bonds are fixed rate and typically unsecured. Mr. Ganz noted that whether loans are treated as securities has very material practical implications and explained that the determination of whether a loan is a security is based on a series of legal precedents. The discussion then shifted to market fundamentals and technicals. The market overview showed that despite being good proxies for each other, the two asset classes have traditionally performed very differently.
Rounding out the discussion was the topic of performance expectations, where “uptiering” the reprioritization of senior secured lenders during DIP financing, and “dropdown” financing collateral transfers were explored, along with their effects on recoveries. The bottom line? While many aspects of the two markets have converged, many important distinctions remain between the two markets.