Broadly Syndicated Loans (BSL)
Broadly Syndicated Loans are institutional-grade leveraged loans made to large corporations (typically $50M+ EBITDA) and distributed across 50-200+ institutional lenders. These loans comprise 95% of CLO collateral and represent the $1.4 trillion institutional loan market. Understanding BSL characteristics, structure, and credit profile is essential for CLO investors.
What Are Broadly Syndicated Loans?
Definition and Market Size
Broadly Syndicated Loan (BSL): A leveraged loan issued to a rated borrower (typically B+ to BB-) where the facility is divided among 50-200+ institutional investors including banks, CLOs, mutual funds, and insurance companies.
Market size: $1.4 trillion outstanding (2024), up from $600 billion in 2010
CLO ownership: CLOs own approximately $700-800 billion (60%) of the BSL market, making them the dominant buyer.
Typical BSL Borrower Profile
| Characteristic | Typical Range | Example |
|---|---|---|
| EBITDA | $50M - $1B+ | $200M EBITDA manufacturing company |
| Total Debt | $200M - $5B+ | $1.2B term loan + $300M revolver |
| Leverage (Debt/EBITDA) | 4.0x - 6.5x | 5.2x (1st lien: 4.5x, 2nd lien: 0.7x) |
| S&P Rating | B+ to BB- | B+ (most common rating) |
| Revenue | $500M - $10B+ | $2B annual revenue |
| Sponsor Ownership | 60-100% | PE-backed LBO (Apollo owns 85%) |
BSL Loan Structure
Key Structural Features
- Seniority: First lien secured (99% of CLO holdings) with priority claim on all assets
- Security: Perfected security interest in substantially all assets (accounts receivable, inventory, PP&E, IP)
- Floating rate: SOFR + spread (typically 300-550 bps), resets quarterly
- SOFR floor: 0-50 bps (ensures minimum yield even if SOFR = 0%)
- Maturity: 5-8 years (typically 7-year term loans)
- Amortization: Minimal (1-5% annually) or bullet repayment
- Prepayment: No penalty after 6-12 months (101 call protection initially)
Typical Loan Syndicate Structure
Example: $1 billion Term Loan B
| Investor Type | % Ownership | $ Held | Primary Motivation |
|---|---|---|---|
| CLOs | 60% | $600M | Spread arbitrage (borrow @ SOFR+150, earn SOFR+450) |
| Loan Mutual Funds | 15% | $150M | Floating-rate income for retail investors |
| Insurance Companies | 10% | $100M | Yield pickup over IG corporates |
| Banks (hold) | 8% | $80M | Relationship lending, sell down over time |
| Hedge Funds | 5% | $50M | Relative value trades, distressed opportunities |
| Other | 2% | $20M | SMA accounts, family offices |
BSL Loan Pricing and Spreads
All-In Yield Components
Total Yield = SOFR + Spread + Floor Benefit - Fees
Example (2024):
- SOFR: 5.35%
- Spread: +425 bps (B+ rated Term Loan B)
- SOFR Floor: 0 bps (floor not relevant when SOFR > 5%)
- Upfront OID: 99 cents (100 bps yield boost)
- All-in yield: 9.60% + 1.00% OID = 10.60% total return if held to maturity
Historical Spreads by Rating (2024)
| S&P Rating | SOFR + Spread | All-In Yield (SOFR=5.35%) | Default Rate (Historical) |
|---|---|---|---|
| BB | +250-325 bps | 8.10% | 0.8% annually |
| BB- | +325-400 bps | 9.00% | 1.5% annually |
| B+ | +400-475 bps | 9.85% | 3.0% annually |
| B | +475-550 bps | 10.60% | 4.5% annually |
| B- | +550-650 bps | 11.50% | 7.0% annually |
| CCC+/CCC | +800-1200 bps | 15.00% | 20-30% annually |
Covenant Protections
Covenant-Lite vs. Covenant-Heavy
The BSL market has shifted dramatically toward "covenant-lite" structures:
| Feature | Covenant-Lite (95% of market) | Covenant-Heavy (5% of market) |
|---|---|---|
| Maintenance Covenants | None (springing covenant on revolver only) | Quarterly leverage, coverage tests |
| Lender Control | Minimal until payment default or bankruptcy | Can force deleveraging if covenants breached |
| Borrower Flexibility | High - can pursue aggressive strategies | Limited by financial covenants |
| Recovery in Default | 70-80% (2000-2024 average) | 75-85% (slightly better early detection) |
Standard Incurrence Covenants (Cov-Lite Loans)
Even covenant-lite loans contain incurrence covenants that restrict actions unless specific tests are met:
- Restricted payments: Dividends/buybacks limited unless leverage < 4.5x
- Additional debt: Cannot incur more debt if pro forma leverage > 6.5x
- Asset sales: Proceeds must repay debt unless reinvested in business
- Affiliate transactions: Transactions with sponsor must be at arm's length
- Change of control: Loan becomes callable at 101 if company sold
BSL Credit Performance
Historical Default Rates
Leveraged loan default rates (1997-2024):
- Long-term average: 3.2% annually (par-weighted)
- Great Financial Crisis peak: 9.8% (2009)
- COVID crisis peak: 3.4% (2020, muted due to Fed intervention)
- Recent benign period: 0.5-1.5% (2021-2024)
- 2025 projection: 2.0-3.0% (gradual normalization)
Recovery Rates (Upon Default)
When loans default, recovery rates depend on capital structure position:
| Loan Type | Average Recovery | Range (10th-90th %ile) | Time to Recovery |
|---|---|---|---|
| 1st Lien (secured) | 76% | 55-95% | 12-24 months |
| 2nd Lien (secured) | 42% | 15-70% | 18-36 months |
| Unsecured (senior notes) | 25% | 5-50% | 24-48 months |
Why 1st lien recoveries are high: Secured by all company assets, first in line, can force asset sales or operate company through bankruptcy.
Industry and Sector Composition
Typical BSL CLO Portfolio by Industry (2024)
| Industry | % of Portfolio | Default Risk | Rationale |
|---|---|---|---|
| Software / Technology | 16% | Low-Moderate | Recurring revenue, high margins, defensive |
| Healthcare / Pharma | 14% | Low | Non-cyclical demand, regulated industries |
| Business Services | 12% | Moderate | Diversified client base, B2B services |
| Telecommunications | 8% | Low | Infrastructure assets, stable cash flows |
| Manufacturing | 10% | Moderate-High | Cyclical, supply chain risks |
| Consumer Products | 9% | Moderate | Brand value, consumer discretionary risk |
| Retail / Distribution | 7% | High | Amazon risk, margin pressure, secular decline |
| Energy / Utilities | 4% | Moderate-High | Commodity price volatility |
| Other | 20% | Varies | Hotels, transportation, chemicals, etc. |
BSL vs. Other Credit Markets
Leveraged Loans vs. High Yield Bonds
| Feature | Leveraged Loans (BSL) | High Yield Bonds |
|---|---|---|
| Seniority | 1st lien secured | Senior unsecured or subordinated |
| Recovery Rate | 76% (1st lien) | 40% (unsecured) |
| Interest Rate | Floating (SOFR + spread) | Fixed coupon |
| Duration Risk | Near-zero (quarterly resets) | 4-6 years (fixed-rate bonds) |
| Typical Maturity | 5-8 years | 5-10 years |
| Covenants | 95% covenant-lite | 100% covenant-lite (incurrence only) |
| Market Size | $1.4T | $1.3T |
Why CLOs Dominate BSL Ownership
Perfect Structural Fit
- Floating-rate match: CLO liabilities float (SOFR + spread), so floating-rate assets avoid duration mismatch
- Diversification: CLO can hold 150-300 loans, achieving diversification impossible for most direct lenders
- Arbitrage magnitude: Borrow @ SOFR+150 (AAA), lend @ SOFR+450 (B+) = 300 bps gross spread
- Rating agency acceptance: Agencies model 31-40% default scenarios, but BSL history shows 3.2% average - massive over-collateralization
- Reinvestment flexibility: Can trade in/out of loans during 4-5 year reinvestment period
Key Takeaways
- BSL = $1.4T institutional loan market; CLOs own 60% ($700-800B)
- Typical borrower: $50M+ EBITDA, 4.0-6.5x leverage, B+ rated, PE-backed
- Structure: 1st lien secured, SOFR + 300-550 bps, 5-8 year maturity, 95% covenant-lite
- Default rates: 3.2% historical average, 9.8% GFC peak, 76% recovery on 1st lien
- Floating-rate structure eliminates duration risk (key advantage vs. HY bonds)
- CLOs are natural buyers due to floating-rate liabilities, diversification needs, and arbitrage economics