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Recovery to take up to a year Back  
The issue of when the global securitisation markets will stage a full recovery following this summer’s credit crunch will take centre stage at next month’s Finance Dublin International Securitisation Conference. While the jury is out as to when exactly issuers and investors will return to the market, a recent survey has indicated that it will take at least more than nine months.
It’s going to take more than nine months for the leveraged finance market to find its way back to July 2007 activity levels, according to a survey of industry players.

The survey, by law firm Norton Rose, reveals that, with the credit turmoil affecting the pricing of debt, indicating higher pricing levels and the disappearance of reverse flex, over two thirds of the respondents to the survey believe that it will take more than nine months for the market to find its way back to July 2007 activity levels, with 45 per cent specifying twelve months as more likely.
With lenders no longer having the liquidity they had available just two months ago, structuring of leveraged deals will also be different say respondents, as the inability of lead arrangers to sell down debt seems also to be combined with a different concern: whether deals have sufficient credit quality. Ninety-one per cent of the respondents to the survey believe that, whenever the leveraged market picks up again, it will mean a revival of the amortising A tranche and more than three quarters (78 per cent) say that it is likely, or indeed very likely, that the A tranche will increase relative to non-amortising B and C tranches.

Tomas Gardfors, a banking partner at Norton Rose said, ‘It is unlikely that the long-term future of the leveraged finance market has been materially affected by the liquidity crisis, but whether features like covenant-lite will re-emerge when the market picks up is less clear. It may be that arrangers have long memories and the market will seek to retain sizeable A tranches for a longer period as banks implement stricter credit controls’.

Meanwhile Standard & Poor’s, in a report ‘Considering Investors’ Renewed Focus On Default Risk And Recovery Prospects In The European Leveraged Finance Market’ published on September 26th, say that already there are signs that the European leveraged finance market is focusing more on fundamental credit and will differentiate deals much more on the basis of default risk and recovery prospects than has been the case in recent years.

‘The leveraged finance market is in a holding position right now as market participants wait to see how the first transactions brought to market after the liquidity crunch will fare,’ said Taron Wade of Standard & Poor’s leveraged finance and recovery group.

The new leveraged transactions - as well as those already on banks’ balance sheets - that have been getting to market are typically midsize deals able to tap local bank liquidity. Arrangers of debt have been exploring all sources of possible liquidity, including mezzanine investors, the asset-backed loan market, and the repackaging of loans to high-yield investors. Structural enhancements to transactions are also being considered, such as converting debt to non-cash-pay facilities.

‘The market is trying to find a new equilibrium as the balance of power shifts to investors from issuers,’ Wade added. ‘This may take some time as arrangers anticipate that the first few deals out to syndication may suffer unduly from the dislocation, resulting in the need for severe concessions to investors on pricing and structure.’

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