The leveraged loan market, moribund for much of the last year, is showing evidence of revival. The telltale sign: the rollout of a $2.75 billion senior financing package backing Warner Chilcott plc's $3.1 billion acquisition of Procter & Gamble Co.'s prescription drug business. The success of the deal -- market sources believe it will succeed -- could bolster a market that has been largely quiet, even as the primary market for high-yield bonds has surged.

"It's a good sign if the market is receptive to large M&A financings," says Darren Schmalz, a loan-market analyst for Fitch Ratings Ltd.

According to a loan commitment letter Warner Chilcott filed with the Securities and Exchange Commission, the underwriting banks -- Bank of America Corp., Barclays Capital, Citigroup Inc., Credit Suisse Group, J.P. Morgan Chase & Co. and Morgan Stanley -- will offer a $250 million, five-year revolving credit line, a $1 billion, five-year term loan A and a $1.5 billion, five-year term loan B as part of the senior-secured portion of the financing package. The remainder will come from a $1.4 billion unsecured bridge loan that will presumably be taken out by a high-yield bond offering. (Warner Chilcott is financing the $3.1 billion deal with $4.1 billion and using the extra money to refinance debt.)

Market watchers are most interested in the B loan, which the commitment letter says banks will syndicate to institutional investors at an original issuer discount of 98% of par. Those investors are mainly the collateralized loan obligations that made up the bulk of leveraged loan investment during the credit boom but who have largely been on the sidelines since the credit bubble popped.

Their disappearance contributed to the freeze in leveraged lending that began in earnest in the summer of 2007 but accelerated after Lehman Brothers Holdings Inc.'s collapse at the end of last year's third quarter.

And what a freeze. According to Thomson Reuters' Loan Pricing Corp., syndicated leveraged loan volume in the third quarter of 2008 totaled $100.9 billion, but then plunged to $38 billion in the fourth quarter, and fell again to $32.33 billion in the first quarter of this year. Since then, the loan market has seen some green shoots, as volume rose to $69.18 billion in the second quarter, the highest total since the $64 billion issued in the first quarter of last year.

Volume in this year's third quarter, which includes the traditionally quiet summer months, so far totals $41.4 billion.

While there are no signs of a rebirth of CLO issuance -- although Wells Fargo & Co. analyst Dave Preston says, "More people are talking about it" -- those investors have been more active in the loan market, which has helped spur new issuance.

The recent activity is a function of a refinancing wave that has hit loan markets, as issuers replace loans that will mature in the next few years with bonds that have longer maturities, says Chris Donnelly, analyst for Standard & Poor's Leveraged Commentary & Data unit.

According to LCD, borrowers have replaced about $23 billion of loans with bonds this year; that money has mostly gone to the CLOs, structured investment pools that borrow to invest in loans, in the form of cash. The CLOs then must either deploy that cash in new deals or use it to amortize debt to their own senior investors. Given that invested money generates more in fees for CLO managers, it's not tough to guess their inclination.

Testament to CLO demand for new deals is that Warner Chilcott's offering, the second-largest institutional offering this year, after a $3.3 billion debtor-in-possession financing for Lyondell Chemical Co., is already being shopped at 98.5% of par, 50 basis points better than the commitment letter envisioned.

Such is demand for Warner Chilcott's institutional loan that the banks may merge the $1 billion A loan -- which the banks themselves generally keep -- with the B loan and offer it as a single $2.5 billion package, according to Donnelly.