Bank Loans Caught Up in the Crisis

Eric Jacobson: Hi, I am Eric Jacobson, fixed-income specialist with Morningstar here today at Eaton Vance and this morning we are talking with Scott Page, a long time manager of bank loan assets at Eaton Vance. Scott, thank you so much so much for joining us today.

Scott Page: Thank you.

Eric Jacobson: So giving where we are in this financial crisis, those who have been paying attention know that the bank loan market has been affected to a great degree. Give us a little feel for how you perceive the health of that market to be these days?

Scott Page: Well it has been hit hard. This has been a very disappointing year but keep in mind that you know we are now in our 20th year of managing bank loans at Eaton Vance. For 19 of those years we delivered positive returns.

This year it we take somewhat of a miracle for that track record to continue but you know this incredible long track record of stability, I think our style of management added stability to an intrinsic--well what we regarded as an intrinsically stable asset class and yet this asset class has very much gotten caught up and through the credit crisis that we are having we are down 20% to 25%. Very, very shocking to our shareholders and to me personally, but despite that I think that the asset class really hasn't fundamentally changed.

Eric Jacobson: Well you know the history of it certainly and the idea behind it at least from the point of view of investors who are on the newer side of things is that you know its debt, its organized by bank loans but it also generally secured and usually senior in the structure so there is this expectation of as you said before stability and safety.

How much of that do you think--you know obviously as you sort of suggested this is a down draft that bank loans got caught in. How much of that security and safety longer term structurally, in terms of the market is still there do you think?

Scott Page: Well to me the company has looked the same as they have looked for 20 years. I mean I think there is some fear out there that you know Wall Street went crazy with mortgages, they went crazy across the board, and credit standards and things like bank loans were dropped.

That is just not supported by the data. When you look at the leverage ratios, I mean I could probably flip up 20 slides right now and present a pretty convincing argument that there is nothing fundamentally different about the companies. When I look at the ratios, the debt to EBITDA, liquidity, all those thing that we have looked at forever, the companies don't look that different.

You know for instance you know right now the median EBITDA of a company in our portfolio over 250 million, that's a significant company. Average is probably 4 to 500 million. I mean that's one difference. The companies are bigger, the ratios of debt, 3.7 times EBITDA, that is senior debt to EDITBA, that's trading at 65 cents on the dollar. I mean the average bank loan is today trading at 65 cents on the dollar.

That takes that valuation down into the twos. Last time I checked you know even the enterprise value of companies and the stock market at even at the today's depressed levels are 9, 10 times and so in the sense of enterprise value covering bank debt, its significant collateral coverage and as you mentioned we are senior and secured.

You know it's a little bit of an oversimplification but you know other people don't get paid until we get paid, so high-yield bonds, equity, the private equity that's in a lot of these transaction, they are supporting our collateral value. They are beneath us.

Yes there will be an increase in defaults. We don't quite know the dimensions of what the next two years or 18 months is going to hold but we take a lot of--I think being senior and secured will be very protective and at 65 cents its already pricing essentially almost the 100% default rate into our portfolio so its really, we are really at an extreme moment in bank loans. It's really about 90 days old I mean even through the mid summer we were down you know just low single digits.

It's really been September, October, November that the valuations have entered a very, very sharp decline and I think for astute, well informed investors who do their homework on managers and take a look at the types of things they are buying you know it could be a significant opportunity.

Eric Jacobson: Well, that's good news probably so thank you very much for joining us today. We really appreciate it.

Scott Page: Thank you.

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