Terms They Are A-Changing

There’s nothing that takes the froth off an issuer-friendly market faster than a growing pipeline. Absent some kind of global galactic event like a meteor strike or Iceland winning the World Cup, it’s good old-fashioned supply that impacts demand.

In part, it’s a matter of band-width. Loan underwriting, even for liquid, on-the-run, broadly syndicated names, is labor-intensive. Asset managers are a lean bunch staffing-wise. Analysts can juggle only so many live deals at once. Add one more to the pile – especially a “story” or if terms are too aggressive – and it will be set aside.

If too many buyers disengage, the arranger’s sales desk will quickly call around, asking, “Where do you care?” Translation: What will it take for you to pick the deal back up? Better pricing? Lower leverage? A covenant? Higher OID? Change what the company does?

If the healthy new deal flow continues, more borderline credits will be sent back to the shop and reworked. Keep it going longer and even the better financings will see some investor-friendly modifications. Give it a month or two and we could see the pendulum swing further to the buy-side.

How does the middle market fit into this dynamic?