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Primary vs. Secondary Markets
Leveraged bank loans may be sold in the primary (new issuance) or secondary markets, typically to banks and
other institutional investors, such as insurance companies. The secondary market is where financial instruments
trade after they have been initially issued and sold, and are no longer considered new issues. Secondary market
leveraged bank loan sales typically occur through dealers at large banks. Leveraged bank loans are actively traded
on the secondary market.
Types of Leveraged Bank Loans
Common traits among leveraged bank loans include that these loans are rated BB+ or lower, they are floating rate
based off a referenced rate, they are secured and they are structured by a group of banks referred to as a
“syndicate.” Leveraged bank loans are also key components for corporate finance, mergers and acquisitions and
leveraged buyout (LBO) activity. A few of the common types of leveraged bank loans in the market are discussed
below; they are also the predominant types of loans that are included as collateral for CLOs.
Covenant-Lite (“Cov-Lite”)
Cov-lite generally refers to loans with loose financial maintenance covenants; that is, borrowers are not required
to maintain certain financial performance measures throughout the life of the loan. There are also variations of
cov-lite whereby covenants are loosely set or are only triggered for a certain portion of the loan. The financial
covenants are intended to provide an “early-warning” mechanism to lenders of a potentially deteriorating credit
situation. FitchRatings research cites that the emergence of cov-lite loans in late 2012 (since the financial crisis), is
due to the evolution of the investor base and increased sophistication of the lending market. According to
FitchRatings, cov-lite loans have comprised the majority of newly issued leveraged loans, and they have become
the norm in the institutional leveraged market. Cov-lite loans are typically used for leveraged buyouts and other
large, sophisticated loan transactions and are typically issued in the form of term loans. In 2017, cov-lite loan
issuance reached a peak of $742 billion, the majority of which (17%) were in the technology industry.
Second-Lien Loans
Second-lien loans are “second-in-line” for any post-bankruptcy recoveries, after first-lien loans; that is, claims are
junior to those of first-lien. Second-lien loans are typically highly leveraged and low in credit quality (single B to
CCC rating categories) and, therefore, considered risker than first-lien loans. Second-lien loans are more attractive
than first-lien from a yield perspective. In addition, appetite for second-lien loans increases when a search for
higher yield occurs, such as in a continued low interest rate environment. The attractiveness of second-lien loans
moves in tandem with market volatility and investors’ risk appetite. They are typically issued as a term loans.
CLO portfolios may contain a limited amount of second-lien loans as specified in the transaction’s investment
guidelines. According to FitchRatings research, new issuance of second-lien loans reached a peak of $39.2 billion
peak in 2007.
Middle Market Loans
While the definition may vary slightly acorss different sources, middle market loans are generally made to
companies with less than, or equal to, $500 million in gross revenues and less than, or equal to, $50 million in