Case | HBS Case Collection | April 2008 (Revised December 2008)

Leveraged Loans 2007

by Andre F. Perold and Erik Stafford

Abstract

The leveraged loan market was in a crisis during the summer of 2007, following many years of low realized volatility (less than 4% per annum), an index of leveraged loans had fallen over 5% in the month of July. A sudden drop in capital market prices for an asset class can be caused by news affecting fundamental values; or by a widespread liquidity shock. The implication of a shock to fundamental value is that the price drop is permanent, whereas if the underlying cause of the price drop is caused by a liquidity event, the situation may represent a profitable investment opportunity. Investors must assess the likely cause of the recent price drops in the leveraged loan market and determine an appropriate investment strategy.

Keywords: History; Financial Liquidity; Investment; Financial Crisis; Market Transactions; Disruption; Decision Choices and Conditions; Competitive Strategy; Capital Markets; Crisis Management; Commercial Banking; Banking Industry; Financial Services Industry;

Citation:

Perold, Andre F., and Erik Stafford. "Leveraged Loans 2007." Harvard Business School Case 208-145, April 2008. (Revised December 2008.)