CREDIT SPREADS IN THE MARKET FOR HIGHLY LEVERAGED TRANSACTION LOANS

This paper is an empirical exploration of the determinants of the requ ired credit spreads on highly leveraged transaction (HLT) loans. The a nalysis uses a multi-factor spread model to estimate the movement of l oan spreads relative to spreads required in the (competing) corporate bond market as well as the significance of loan-specific characteristi cs in determining loan spreads. The empirical estimates are based on t he Loan Pricing Corporation's database which consists of over 4000 loa n transactions between 1987 and 1994. We find a positive HLT loan spre ad sensitivity to changes in spreads in the corporate bond market, but this sensitivity is significantly less than unity; indicating that th e HLT loan market and high yield public debt market are not fully inte grated. Furthermore, there is evidence that lenders augment, rather th an substitute, loan yield spreads with additional fees for syndication , commitment and cancellation risks. In general syndicated loans have lower yield spreads than other HLT loan types. (C) 1998 Published by E lsevier Science B.V, All rights reserved.