Credit Market Turmoil And Stimulus Package Bolster U.S. Loan Buybacks

The credit crisis that began in August of 2007 and intensified with Lehman Brothers' September 2008 bankruptcy continues largely unabated in U.S. loan markets in early 2009. Many bank loans, particularly leveraged loans, continue to trade at a significant discount to par in illiquid secondary markets. Borrowers have begun sensing opportunity.

It is estimated that more than 25 U.S. companies have attempted buybacks of their bank loans in the last year or so. Given the challenges posed by the recession and the current premium placed on liquidity preservation, not every borrower has (or will be comfortable deploying) the resources necessary to buy back its loans. For those able to do so, however, the benefits can include the monetization of a significant trading discount to par, as well as a reduction in leverage and interest cost, which may ease ongoing compliance with ratio covenants.