How does the leveraged loan secondary market work?

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AcadiFi · Accepted Answer

Leveraged loans are senior secured bank debt issued by sub-IG corporate borrowers. The secondary market is primarily OTC, with LSTA-governed trade conventions and T+7 settlement (versus T+2 for bonds).

Mechanics:

1. Loans trade in $1M minimums, usually at dealer markups, with bid-ask spreads of 25-100 bp in normal markets, widening to 300+ bp in stress.
2. Settlement involves assignment agreements and administrative agent consent, hence the long T+7 convention.
3. Pricing quoted as a percentage of par (e.g., 99.25 means 99.25% of face). For distressed loans, quotes can trade below 70.
4. Covenant-lite loans (no maintenance covenants) now dominate new issuance, affecting workout dynamics.

The LCD Leveraged Loan Index provides benchmark total returns. Average loans yield SOFR + 400 bp in 2026, floating rate, which gives natural protection against rising rates relative to fixed-rate HY bonds.

Key participants:

- CLOs: buy 60-65% of new-issue loans.
- Loan mutual funds and ETFs (BKLN, SRLN): retail and institutional access.
- Hedge funds and BDCs: opportunistic buyers, especially in distress.

For Pinegrove Industrial's $500M term loan trading at 96.5 with SOFR+425 spread and 3-year life, yield to maturity is approximately 5.3% (SOFR) + 4.25% + amortization of discount = roughly 10.5%. Compare to the same issuer's 7% bonds at 92 (YTM ~9.5%). Loan offers higher yield plus senior secured position.

Liquidity vs. bonds is thinner; expect 30-50 bp more roundtrip cost in normal markets.

How does the leveraged loan secondary market work?

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