Certainly, given the ratings picture here, second-lien loans are not for the faint of heart.
To put these figures in context, second-lien loans have even printed wide of high-yield bonds.
This increase notwithstanding, second-lien remains a small fraction of institutional loan issuance, at 5.6% in the year to date.
Given these credit stats, it follows that second-lien loans are wide-margin product taken primarily by relative-value investors, arrangers say.
The company plans to originate and invest in first- and second-lien loans that will have a term of 3-6 years.
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In part, the premium reflects the inferior liquidity of second-lien paper.
Since September, the average debt multiple through second-lien is a hefty 5.4x, versus 5.1x earlier in the year, with little debt cushion further down in the capital structure.
Understandably, then, the issuer base for 2012-model second-lien loans is dominated by (1) loans with CCC facility ratings (mainly from issuers with a single-B corporate-rating profile) and (2) unrated middle-market paper.
Existing lenders were in a power position, having to amend to approve the incremental debt used to fund the dividend, and second-lien investors in particular were concerned about the additional first-lien debt coming in ahead of them.
Of course, second-lien debt is a niche product for issuers that require higher leverage than is usually available in the first-lien market, but that in many cases are locked out of the regular-way high-yield bond market because of size, credit quality, or complexity.
The North American Distressed Debt Market Outlook 2011, a survey of 100 experienced distressed debt investors released by Debtwire, Macquarie Capital and Bingham McCutchen, found that these investors will move their cash from energy to real estate assets and from first and second-lien loans to common equity and convertible bonds.
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