OID - Original issue discount - think of as “Upfront fee You can see them in bonds sometimes but I'd say they are much more common in loans where committed financing is more common. This becomes material in the case of a big OID. of as much as 15-18 pts (loans trade in low 80s).Īs the OID grows, it is increasingly important to remember that in a bankruptcy, your claim is generally adjusted down for the size of the OID. I've seen OIDs on hung bridges, deals struck as market is turning etc. After that, if the banks cannot build a book, they will either choose to hold back some of the loan on their balance sheets (not fully syndicate) or they will choose to use a deeper OID that comes out of their P&L in order to find a clearing level. Usually committed deals have 150-200bps of flex (this varies of course) of which 100bps can be OID. Depending on if the financing is best efforts (then somewhat ignore this) or committed- meaning the underwriting banks are taking the risk. Anything beyond that is generally a tougher deal to get done or the borrower has some reason to want to keep spread lower and is willing to give on OID to accomplish that. 25 (think too many CLOs demanding paper, not enough new loans) to 1-1.5pts. OIDs are, as was stated, another form of getting to a target return. However, a loan pricing at a 98 OID is generally not going to be able to be flipped at par in the first day of trading- 2 pt OID implies a tougher deal. sales & trading make incremental $ on secondary trading and maintaining secondary liquidityĪll of this adds to the overall attractiveness of the companies story here from an equity, debt, PR perspective and adds fuel to future transactions or mkt awareness generally.Īgree with most everything said above. capital mkts bankers executed successful, oversubscribed fundraising client has successful, oversubscribed fundraising Lead bank not only successfully syndicates the deal but can also manage secondary trading/liquidity of the deal post-allocation as investors bid for more paper and short-term holders take their profits. Successful fundraise leads to oversubscription to the transaction which results in cut-backs in investor allocations and thereby leaves investors wanting to buy more in the secondary market. OID is a sweetener to potential investors which increases the chances of a successful fundraise for the client. Note: This relates to large liquid, institutional loans (TLBs) Both instruments should be part of a diversified investment portfolio, so investors need to understand the different roles each plays rather than choosing one for the other.įor those investors with a lower risk profile and preferring credit quality over higher yield, move on to Part 7 in this series.There are a few things at play here beyond what has already been said. While both instruments are structurally similar, FRNs carry no risk and have much shorter maturity, so their return is lower. In the case of FRNs, the returns are commensurate with those of a money market investment. HJ Heinz, which was recently taken over by Berkshire Hathaway (BRK-B), is the largest issuer in the index, yielding 3.25%. However it wasn’t until recently that retail investors had access to such a market via leverage loan ETFs like SNLN and BKLN. Over the past two years, leveraged loans have had returns just below the returns of high yield bonds. Note that the higher risk of leveraged loans results in a much higher return for investors. While both leveraged loans and FRNs pay floating rate coupons and have similar durations (for similar coupon schedules), leveraged loans are higher-risk and command higher spreads due to their poorer credit quality. While FRNs are typically unsecured and investment-grade, leveraged loans are secured and fall into the below–investment grade category. FRNs are usually issued in capital markets, whereas leveraged loans are arranged by commercial and investment banks.
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