Are borrowing rates really coming down?
Been hearing from different bankers that borrowing rates for LBOs and various forms of debt are coming down. Not sure how or why this is occuring since Prime and SOFR are at very elevated levels - are bankers just reducing their spread to get deals done to start the year? Nothing to me at a macro level points that the economy is improving so not sure why everyone keeps claiming rates are coming down unless they are just BSing.
https://www.wsj.com/articles/cfos-after-a-volatile-year-capitalize-on-f…
Tldr: spreads and yields are coming down in anticipation of (I) rates being lowered (ii) Investors are moving out of bonds and into equities and (iii) Getting it done now ahead of a particularly uncertain presidential election
Yes rates are coming down for first lien syndicated debt. You’re not understanding how bankers’ underwriting works. They can’t “bring rates down” to get deals done as they don’t own the debt they sell it to CLOs which ultimately dictate the yield. The bankers just provide a range of pricing where market will price the loan. In fully underwritten financing they will guarantee that pricing, generally within 200 bps of “all in yield” known as “flex”. If the loan prices outside of the “guaranteed” all in yield the bankers will take a loss on the difference almost always in the form of more OID
This. Would add that spreads are tightening in senior / uni direct lending as well. Lot's of capital out there competing to be deployed and recession fears and uncertainty that caused the gap up last year have subsided a bit.
To Op on macro economy not improving, spreads widen last year more on the fear that rate increases were going to cause of wave of tightening and defaults, which hasn't really played out (obviously can point to amend & pretend, etc. but not seeing catastrophic failures).
Thanks! Do you mind elaborating on how CLOs really price the debt?
overly simplified: supply and demand
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