RELATIONSHIPS DETERMINE WHAT ENDS UP in March 2020, leveraged loan issuance dropped by 65% ON BANK BALANCE SHEETS relative to its trailing 12-month average. But the only reason issuance didn’t drop 100% was because all of the leveraged Banks do hold a pro-rata tranche of leveraged loans on loan originations that month came in the form of bank-retained 5 balance sheet, which typically consists of a revolving credit revolving credit facilities. And these loans were extended at facility with tighter spreads and covenants. But this balance an especially steep discount: the average spread on revolvers sheet capacity tends to be allocated strategically in service issued in March 2020 was 157bps, which was 220bps below the of high-value clients. This is evident when examining bank average spread on the same facilities from the prior month.6 behavior during periods of market stress. When spreads widen (loan prices drop) and leveraged loans cannot be Such behavior may appear uneconomic to credit investors easily distributed to CLOs or other buyers, origination focused solely on extending credit at terms that deliver high volumes tend to drop, often precipitously, but the pro- returns net of any default losses. But it merely re昀氀ects the rata share of loan facilities intentionally retained by banks extent to which the economics of banking strays from pure consistently rises at the same time (Figure 11). credit intermediation. The implied value of a client relationship 7 to a bank is equal 11.6% of loan principal, on average. And one These revolving credit facilities are obviously extended to suspects banks’ credit allocation decisions will become even bolster relationships. For further proof, consider the inverse sensitized to the needs of high-value clients in the future, as relationship between spreads on newly-issued pro-rata regulation (Basel III Endgame), further constrains bank risk- tranches and spreads on secondary market credits (Figure taking and the share of balance sheets that can be allocated to 11). When credit markets froze at the onset of the pandemic capital-intensive loans (Figure 12, page 11). Figure 11. Pro-Rata Share of Loans Rises & Spreads Compress During Market Stress Figure 11. Source: Carlyle Analysis; Pitchbook, LCD Database, March 2024; Bloomberg, March 2024. There is no guarantee any trends will continue. 5. Pitchbook, LCD Database, Accessed March 2024. 6. While some of this inverse relationship could be explained by higher borrower quality during stressed periods (BB rather than B-rated credits, for instance), most of the gap looks like concessionary terms. 7. Ruchti, T. et al. (2024), “The Value of Lending Relationships,” O昀케ce of Financial Research, U.S. Treasury. 10