| NEW YORK
NEW YORK Jan 10 Loan traders expect a strong
technical market and excess demand to support high secondary
prices in early 2017 as fears of further rate rises funnel more
cash into the asset class and traders focus on sectors that
could benefit under the Trump administration.
Average secondary bids rose to 98.09 on January 9, after
climbing 2.8bp in 2016 in the biggest annual rise since 2012 and
from a four-year low of 94.4 in February, according to
LSTA/Thomson Reuters LPC MTM Pricing.
"We are on fire. It's hard to see what will change until
further notice," a loan trader said.
Secondary prices rallied strongly in 2016 and returns soared
to 10.16%, boosted by the oil price recovery. With 45.8% of
loans trading over face value or par on January 5, compared to
only 1.57% at the end of 2015, this performance will be harder
to match this year, traders said.
Investors struggled to find deals in the primary market last
year, which inflated secondary prices, caused downward pressure
on primary pricing and prompted a wave of repricings.
Demand is expected to stay high this year. Cash continues to
flow into the asset class as investors buy floating rate loans
to hedge against the three possible interest rate rises that the
Federal Reserve is flagging. Most US leveraged loans are now
floating rate after 3-month Libor hit 1.005% on January 4,
exceeding a 1% Libor floor cap rate on most loans.
Bank loan mutual funds have seen strong inflows since
August, according to Thomson Reuters Lipper, with four weeks of
inflows topping US$1bn since November 8, after Donald Trump's US
election win, bringing the total for 2016 to US$6.7bn.
In December, US$7.28bn of new CLO funds were issued, after
US$10.6bn in October, bringing the annual total to US$72.4bn and
institutional investors are continuing to stream cash into
separately managed accounts, sources said.
"Investors are using the loan asset class for what it's been
known for: a hedge against rising rates and inflation. Credit is
likely to perform well and investors are still hungry for
yield," said Jonathan Insull, a portfolio manager at Crescent
Investor demand is so strong that even loan repricings,
which cut coupons and returns and typically trade at lower
levels, are failing to put a brake on secondary prices. Several
deals have traded as high as 101 in recent weeks.
Rubber producer Kraton Polymers LLC's US$1.278bn term loan
traded at 101.25-101.75 in mid-December and remained at
101.125-101.625 in early January after cutting the spread by
100bp to 400bp over Libor with a 1% floor.
Cloud services company Rackspace Hosting's US$2bn term loan
broke at 100.625-101.125 in mid-December and rose to trade at
101.25-101.625 in January after shaving pricing by 50bp to 350bp
over Libor with a 1% floor.
"Perhaps if supply increases that may impact secondary
prices. Until then loans can trade at least 50bp above par,
until repricings happen, even then we are seeing repriced loans
trade right back up," a loan trader said.
WINNERS AND LOSERS
Traders are focusing on sectors that may benefit under the
new Trump administration that previously struggled with
regulation or political scrutiny including pharmaceuticals,
which were criticized on pricing by Democratic nominee Hillary
Clinton, and utilities, sources said.
Average bids in the healthcare sector were 98.26 on January
9, up from 97.68 on November 9 immediately after the US election
result. Pharmaceutical company Valeant's term debt has climbed
since Trump's election win, gaining more than a point to
100-100.5 on January 9. Drug firm Mallinckrodt's term loan added
also almost a point to trade at 100.25-100.75 in early January.
Average bids in the utility sector have climbed to 97.02
from 96.16 since Trump's election. Power company Calpine's
repriced term loans traded above par on the break in December
and power company Lightstone Generation's new US$1.575bn term
loan B and US$150m term loan C traded at 99.5-100.5 in
Other sectors may be less favored, including hospital
companies such as Community Health Systems if the Affordable
Care Act is overturned, sources said. The term loans of defence
companies could also tumble if Trump continues to protest about
their bills to the government.
The retail sector also remains an area of concern,
particularly clothing retailers and specialty item vendors, as
consumers continue to move to online shopping and make lifestyle
Apparel retailer J Crew's term loan has tumbled more than 23
points from early October to 54-57 on January 9. Children
clothing retailer Gymboree's term loan has sunk nearly 28 points
in the same time to 51-53 in January. And high-end department
store Neiman Marcus' term loan dipped nearly 6 points in three
months to 86.25-87.25 in January.
(Reporting by Tessa Walsh and Lisa Lee; Editing By Michelle
Sierra and Jon Methven)