Payback Time – Readers’ Say

Our mailbag was overflowing in response to last week’s column on the topic of repayment trends in leveraged loans. Readers mostly bemoaned the lack of discipline by lenders in compelling borrowers to reduce debt in the form of real amortization.

We considered how quaint the notion has become of borrowers actually repaying debt over the contractual life of the obligation. Institutional credit investors are congenitally disposed to accepting back-ended paybacks, in part, we noted, due to the match-funded nature of some investors’ long-term assets and liabilities.

One banker scoffed at this notion. “The match funding argument is a bit of a red herring,” he stated. “The vast majority of leveraged loans are floating rate, so the lack of amortization is an accommodation to sponsors rather to the funding needs of lenders.”

Another focused on market practice that relies on excess cash flow recaptures, in lieu of scheduled amortization, to reduce leverage. “The implication sweeps have provided quicker pay downs than seven-year amortization schedules is questionable,” he wrote.