How the Federal Reserve's central bank swap lines have supported U.S. corporate borrowers in the leveraged loan market, Accessible Data
Figure 1. Lenders in leveraged loan syndications after origination
Figure 1 is a stacked bar chart that shows the types of lenders in leveraged loan markets and their shares of the market from zero to 90 days after loan origination. There are 16 series: Agent, Domestic Bank, Foreign Bank, CLO, Mutual Fund, Broker/Dealer, Finance Comp., Hedge Fun, Other Inv. Firms & Fin. Veh., Insurance Comp., Large Asset Manager, Private Equity, Pension Fund, Trust Services, Biz. Dev. Corp, and Uncategorized. The chart shows that the share of banks continuously declines from about 65 percent in loans 0 – 4 days after origination to about 23 percent in loans 45 – 89 days after origination. This decline is offset by increases in the share of CLOs from 15 percent to 35 percent and the share of mutual funds from 8 percent to about 20 percent. The share of other types of nonbanks increases from about 12 percent to 22 percent over the same time period.
Note: Legend entries appear in order from top to bottom. Leveraged loan syndications are defined as loan syndications with a rating of less than BBB.
Source: Lee, Li, Meisenzahl, and Sicilian (2019), figure 4.
Figure 2. CIP deviations and mutual fund and CLO share in new leveraged loans
Figure 2 is a line chart that shows two time series, the mutual funds and CLO share and CIP deviations (bps), from 2010 to 2020. The chart shows that the two series move together. The mutual funds and CLO share is large when CIP deviations are small and conversely, the mutual funds and CLO share is small when CIP deviations become larger (more negative).
Notes: The figure shows the average five-year U.S. dollar Libor cross-currency basis against nine major currencies (a measure of CIP deviations between the U.S. dollar and foreign currencies) over time at a monthly frequency. It also depicts the mutual fund and CLO share in new leveraged loans based on information from the Shared National Credit Reports and ends in 2018 based on the classification in Lee, Li, Meisenzahl, and Sicilian (2019). The correlation coefficient between the average cross-currency basis and the mutual fund and CLO share in leveraged loans is –0.47.
Sources: Bloomberg Finance LP, Shared National Credit (SNC), and staff calculations.
Figure 3. Effect of CIP deviations on effective spread flex of leveraged loans
Figure 3 is a bin scatter plot that shows 20 points representing the average changes in the cross-currency basis and the effective spread flex for equal-sized bins based on 2,646 observations. The chart includes a regression line with a slope of -2.89 and a reported t-stat of -2.86. As such, the chart illustrates a negative relationship between CIP deviation and effect spread flex.
Notes: The figure shows the effective spread flex (y-axis) plotted against the change in the average five-year U.S. dollar Libor cross-currency basis against nine major currencies (x-axis). The cross-currency basis change is the change in the basis from the launch date of the leverage loan deal to the flex date of the deal. The scatter plot based on 2,646 observations was created by grouping changes in the cross-currency basis into equal-sized bins, computing the mean of changes in the basis and the effective spread flex in each bin, and then plotting the points. A line of best fit is also included. The figure excludes outliers and uses a sample of U.S. borrowers only. Loan-specific variables along with macroeconomic and financial variables are used as controls. The year 2018 has been omitted from the estimation. For more details, see Meisenzahl, Niepmann, and Schmidt-Eisenlohr (2020).
Sources: Staff calculations based on data from the S&P Capital IQ Leveraged Loan Commentary Data (LCD) and Bloomberg Finance LP.
Figure 4. Heterogeneous effects of CIP deviations against individual currencies on the effective spread flex
Figure 4 is a scatter plot that shows 9 points representing the net long-term U.S. corporate debt claims-to-GDP ratio and the cross-currency basis regression coefficient from 9 country-by-country regressions. The charts shows that the four currencies with a negative net long-term U.S. corporate debt claims-to-GDP ratio (AUD, CAN, NZD, SEK) have, on average significantly larger regressions coefficients than the five currencies with positive ratios (CHF, EUR, GBP, JPY, NOK). The chart illustrates a negative relationship between net long-term U.S. corporate debt claims-to-GDP ratio and the cross-currency basis regression coefficient.
Notes: The figure shows, on the y-axis, the coefficients associated with various cross-currency bases as shown in columns 2 to 10 in the appendix table (available online, details in note 7), which were obtained by regressing the effective spread flex on changes in the five-year U.S. dollar Libor basis for individual foreign currencies. On the x-axis, the figure displays a currency area’s net U.S. investment position in long-term corporate debt relative to gross domestic product (GDP). This ratio is computed by substracting from the long-term corporate debt liabilities of the U.S. toward a currency area (as of June 2019) the U.S. long-term corporate debt claims on that currency area (as of December 2019). This difference is divided by the currency area’s 2019 annual nominal GDP.
Sources: U.S. Dept. of the Treasury, Treasury International Capital (TIC) Data (annual surveys) and staff calculations.
Figure 5. CIP deviations in the COVID-19 era
Figure 5 is a line plot that shows the time series of CIP deviations (bps) from January 2020 to August 2020. The chart shows that CIP deviations fell from -3 basis points in Mid-February to -11 basis points on March 15th. The CIP deviations tightened afterwards and stood at -8 basis points on March 31st. Since May CIP deviations have increased to about -10 basis points.
Notes: The figure shows the average five-year U.S. dollar Libor cross-currency basis against nine major currencies (a measure of CIP deviations between the U.S. dollar and foreign currencies) over time. The figure highlights two policy actions taken by the Federal Reserve that impacted CIP deviations. On March 15, 2020, the Federal Reserve reduced swap line pricing, leading to a narrowing of CIP deviations. On March 31, it introduced its FIMA repo facility, which also narrowed the deviations.
Sources: Bloomberg Finance LP and staff calculations.
Figure A. The Syndication Process and Timeline
Figure A is a visualization of the syndication process over time. The syndication process starts with borrowers soliciting bids including pricing and risk-sharing provisions from arrangers. The borrower awards the mandate to the preferred arranger. The arranger then proposes a facility agreement that includes all initial loan terms such as the interest rate, the original issue discount, covenants, and repayment options and uses this agreement to market the loan to investors. The marketing or book running takes place in at least one round. In each round, the arranger proposes a facility agreement including all loan terms such as the pricing to investors. If, given proposed loan terms, there is sufficient demand, the loan is originated at those terms. If the demand from the loan is higher or lower, then there is another round. Based on demand that realized with the last set of loan terms, the arranger “flexes,” that is, adjusts the terms accordingly. For instance, if demand was low, then the arranger may increase the interest rate spread or decrease the loan amount in the next round. The process continues until the syndicate is assembled and final loan terms are fixed. Then the loan is originated. After the borrower received the funds, the loan starts trading in the secondary loan market.
Source: Bruche, Malherbe, Meisenzahl (forthcoming).