banks are back to selling , a riskier kind of , thanks to demand from a wider swathe of lenders including their rivals and conventional investors. Second-liens have in recent years been largely provided by private credit firms. But banks are once again selling these transactions to investors including collateralised loan obligations-the biggest buyers of leveraged loans-to slash borrowing costs for issuers.
Wall Street firms are pocketing extra fees by syndicating these deals that may have otherwise been led by direct lenders.
When the Bank of Montreal led a $1 billion second-lien loan for insurance firm last month, it had enough demand from both buyer bases to sell the loan at 5.5 percentage points over the benchmark rate and at a slightly discounted price of 99.5 cents on the dollar. Typically, second-lien loans are sold at a greater discount to par to compensate investors for risk.
“Historically, spreads on second-lien loans were far wider than first-lien loans, and companies were not in a position to service second-lien debt from a cash-flow perspective,” said Rob Fullerton, head of leveraged finance at Jefferies Financial Group.
Demand is high enough that second-lien loans are often only paying about 200 basis points more interest than their first-lien counterparts, according to Fullerton. That’s making it cheaper for the borrowers, making it an easier sell to tack on such liabilities.