The Cost of Illiquidity in the Syndicated Loan Market

From July’s Axiom on Value:

Here we will address the issue of measuring liquidity in the syndicated loan market. The chart below measures the illiquidity of a set of syndicated loans in terms of the difference in yields to maturity. The difference is the YTM of the loan at the valuation date and the YTM of the loan if it were trading in a liquid market.  The latter YTM is generated using Axiom’s Credit Rating and Pricing Platform which has been shown to produce unbiased and accurate estimates of fixed income securities.

As can be seen, the average adjustment in yield is between 3% and 5% which reflects the fact that investors require a sizeable liquidity premium for investing in an illiquid asset. However, for any given syndicated loan, the liquidity premium could be much higher than the average. The reason relates to a number of factors including but not limited to the following:
• The number of investors in the syndicate.
• Club deals are generally more illiquid than larger syndicates.
• Less familiar names underwritten by single investors are likely to have a larger liquidity premium than the average and the Club deal.

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