And how do hedge funds invest in it?
Bank debt is just typically a syndicated loan put together by banks. It is generally for companies not easily able to access the bond markets. Hedge funds invest in it simply by buying it. Banks put together the deals for clients and then sell it to any buyers, funds can also trade it amongst themselves. These longs are typically much less liquid and settlement can take rather long on them so operationally they are a PITA.
I’m no expert, but I believe the main charicteristic of bank loans is that they are senior in the debt structure. They should offer less yield because they are the most secure. That’s the frustrating thing about buying a lot of corporate bond debt, you’re usually lower down the seniority list and unsecured… therefore more prone to loosing significant money in a bankruptcy.
Right now I wouldn’t mind owning some depreciated bank loans from some of the upstream oil companies, but I’m definitely not buying their unsecured corporate debt because it’s just as risky as equity these days.
I believe some bank debt is secured, much is issued senior for struggling companies because they would not be able to get financing any other way. The yields on bank debt are typically pretty high still because it tends to be issued for riskier companies. I havent seen a yield comparison for companies with existing bonds outstanding vs their bank loans though so I am not positive exactly how they compare.
Bank debt is an odd market anyway, it seems very “boys club”-ish and the whole market seems pretty ripe for insider trading based on what I have seen.
Eaton Vance has the lock-down on the bank loan market. Banks loans tend to be floating rate as well so very little interest rate risk. Hedgies would either get a call about an upcoming bank loan from the arranger or buy in the secondary market. Most of them would likely do both to some degree.
Look up Eaton Vance Floating Rate Fund for more info. It’s a $7.4B fund.
so youre competing with CLO and CDO managers
Bank Debt as in debt that settles via ClearPar and the settle date is usually pushed out to 6 months sometimes?
If yes, these are syndicated bank loan.
Par is said to be priced above 90 but this term is really loose and prices above 50 is considered par in some cases. If below it is unofficially considered “distressed.” When it is condsidered “distressed” lawyers are involved. Big pain and more delays.
The settlement of bank debt is just so strange. You have 3 documents; Confirm, Assignment, PPL (funding memo).
Basically you buy bank debt say through Citi. Citi is the seller and you are the buyer. Then there is the Agent who acts on behalf of Lenders. Let’s say Barclays. All 3 parties must sign documents and agree on the amount, interest and price.
Now the settlement date is T+7 but this never happens. Usually (from what I have seen) T+30 and sometimes months. For example your bank debt settled t+30. On the actual settle date you pay the principle, cost of carry and receive interest worth of 23 days (as if you held the security all along).
Yields can be pretty beefy. Our fund usually go for the +9% bank debt.
It’s sometimes called the syndicated market, or SNCs. You can google those two terms. Banks typically do the ‘bank like’ loans and then non-banks typically absorb risk of ‘non bank’ type loans. However the big guys do it all
The regulatory SNC exam is currently underway