When Morgan Stanley and Lehman Brothers quantified the knock taken to their leveraged lending business over the summer in their Q3 earnings statements, much was made of the figures: $726 million for Morgan Stanley and more than $1 billion for Lehman Brothers. But figures like this can disguise more than they reveal – and what the past couple of months have certainly revealed is how random marking to market becomes when there is a massive mismatch between demand and supply. The level at which loans are marked on the books of the arranging banks should be a reflection of the level at which they can be sold in the market. Activity in the LBO market revived in September, with loans being marketed – and successfully sold – at a discounted 96% of face value. Does this mean that the entire $300 billion LBO overhang should be – or is indeed being – marked on the underwriters’ books at 96?
Marking to market rather than accrual accounting in the leveraged loan market is a relatively recent phenomenon. And what has become readily apparent in recent weeks is that there are almost as many approaches to marking loan books as there are loan books themselves.