For most investment-grade companies, the tighter credit market has not been a problem. Most of the approximately $650 billion in syndicated loans issued in 2000 to investment-grade companies are unfunded revolving-credit facilities that back up commercial-paper issuance. Credit-rating downgrades at large borrowers such as General Motors, Ford, and AT&T have restricted their access to the commercial paper market, but have also reduced their need for backup credit lines. All three companies have turned to the bond market for longer- term debt. As in the rest of the credit spectrum, investment-grade spreads over Treasuries have widened throughout the year, but the plunge in short-term interest rates (courtesy of Alan Greenspan) has more than offset the increase in spreads. As of October 31, the average long-term yield on investment-grade corporate bonds was 6.93 percent, according to Moody’s–well below the 7.14 percent yield on September 10. And companies are taking advantage: Corporate bond issuance in October totaled $76 billion, all but $5 billion of which was investment grade.
Most noninvestment-grade borrowers, however, don’t have the bond market to fall back on now. They rely much more heavily on the syndicated loan market for their long-term funding, and have had a far more difficult time securing new credit. After years of consolidation, commercial banks are fewer in number, and they are busy tending to existing clients. They are clearly wary of extending new credit in a deteriorating economic environment. And institutional investors, which now account for about 50 percent of the capital behind high-yield loans, are waiting to see how far prices will fall before they commit to new deals. “The market is a lot more selective now,” says Gates. “The credit ratings on new loans are much higher than they were last year, and the riskier credits are getting squeezed out of the market.”
Like most other assets in the capital markets, bank loan prices took a dive after September 11. Across the board, leveraged loans trading in the secondary market dropped in price, making new deals a more difficult sell. “The leveraged loan market is still finding its feet,” says Meredith Coffey, director of analytics at Loan Pricing Corp.
CommScope Inc. is one victim of the more-selective market. The Hickory, North Carolinabased maker of coaxial and other high-performance cable struck a joint venture deal with Japanese conglomerate Furukawa Electric to purchase Lucent Technologies’s fiber-optic-cable division for $2.75 billion. To finance its $650 million share of the venture, CommScope hired Citibank and CIBC WorldMarkets to launch a $360 million syndicated facility including a four-year, $50 million revolver; a four-year, $85 million term loan for participating banks; and a five-year, $225 million term loan for institutional investors. The institutional tranche was originally priced at Libor plus 350 basis points in early October, and was reportedly later raised to Libor plus 450 points–a good yield given that the loan is secured by assets, but not good enough to attract many takers. CommScope is now attempting to negotiate a lower price with Furukawa or a smaller stake in the venture.