The Art of Pricing Loans (Fourth of a Series)

We noted with interest the “Pi Day” celebrations last Saturday. 3/14/15 echoed that mathematical constant (the definition of which escapes us for the moment), spawned dozens of matrimonials, and marked the birth of Albert Einstein. March 14 was also the birthday of Billy Crystal, though we haven’t figured out the π connection there yet.

Speaking of irrational numbers, we continue our series on pricing loans with a look at the middle market.

As we covered in our first installment, middle market loans – generally defined as issued to companies with less than $50 million ebitda – tend to be syndicated by arrangers who will also hold on to a significant chunk of the exposure. That means mid cap players, unlike bookrunners in the broadly syndicated world, eat their own cooking. Besides being priced “at market,” a deal needs to meet the leads’ own yield requirements.

An increasing number of non-bank lenders are building underwriting capacity by creating diversified pockets of capital within (or alongside) their firms. Any deal they take to market needs to also meet the return hurdles of those vehicles. That’s a good first test to ensure pricing works for other middle market lenders with similar CLOs, BDCs, or separately managed accounts.