Wall Street Shifts Risk of Burning Bed in Loans

Investors chasing yield are taking on more and more credit risk without being compensated for it.

Wall Street banks, burned by commitments to fund leveraged buyouts before the credit crisis, are reducing the chances they’ll be stuck with junk-rated loans again by getting investors to take on that risk.

Banks and borrowers are benefiting as investors agree to set aside money to finance acquisitions, such as Carlyle Group LP’s takeover of Ortho-Clinical Diagnostics Inc., weeks before deals are closed. Money managers often get paid nothing for being in limbo while letting issuers lock in their interest rates. Usually, banks give investors their allocations only days before providing loans.

The push to syndicate deals as early as possible is primarily “driven by underwriters looking to minimize risk,” Kevin Lockhart, co-head of global leveraged finance at Jefferies LLC in New York, said in an interview. “Borrowers also want to lock in rates since they don’t know what will happen in a matter of weeks.”

Borrowing costs in the loan market have fallen. The average interest rate on institutional loans was 4.05 percentage points more than lending benchmarks in June, down from 5.87 percentage points in 2009, according to S&P’s Capital IQ Leveraged Commentary & Data.

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