(LPC) - Threats of a global trade war and continuing geopolitical uncertainty are continuing to stoke wider market volatility, but are offering investors a chance to pick up loans at cheaper prices after months of sustained tightening.
The average bid for US loans in the secondary market dropped to 98.65 from a 2018 peak in late April of 99.01.
The percentage of loans trading above face value or par dropped to 25.9% on June 28 from nearly 60% on May 1. This is the lowest figure since September 2016, according to Thomson Reuters LPC data.
Earlier this year, excess demand stemming from a record pace of Collateralized Loan Obligation (CLO) fund issuance and 19 weeks of inflows into loan mutual funds since February was supporting high secondary prices and helping companies to cut their borrowing costs by repricing loans.
But the lower coupons are weighing on some investors’ portfolios, and managers have begun to push back on some of the market’s more aggressive requests.
At least 13 companies flexed their pricing higher in June, including logistics company Savage Enterprises, which increased pricing on Thursday on a US$1.1bn term loan backing its acquisition of agribusiness Bartlett to 450bp from original guidance of 325bp-350bp, a source said. In May, 26 companies tightened pricing, according to LPC data.
This change in market sentiment has caused the secondary market to trade lower, offering some buyers the ability to pick up credits at a discount.
“Things are a little weaker,” said Joyce DeLucca, a portfolio manager at Hayfin Capital Management.
“The increased new-issue supply has put some pressure on secondary levels and is providing managers some relief [offering buying opportunities] with a higher percentage of loans trading at or below par.”
Companies use the loan market to finance acquisitions and operations and pay a set coupon over Libor, which means lenders’ returns increase as interest rates rise. The three-month reference rate has risen more than 136% in the last 18 months, which is making the asset class an attractive hedge against rising interest rates.
An influx of investor capital seeking floating-rate debt pushed US institutional loan issuance to US$362bn until the end of May, just below volume during the same period in 2017, which was a record year, according to LPC data.
The US leveraged loan market now has US$1.22trn of loans outstanding, surpassing the US$1.21trn high-yield bond market for the first time since the financial crisis, according to Fitch Ratings. But there are signs of fatigue.
The SMi100, an index that tracks the 100 most widely held US loans, fell to 98.31 on June 28 from 98.66 on March 1. The LPC Top 40 Leveraged EMEA index fell to 98.53 from 99.88 during the same period.
Fears of a global trade war rattled the market after the US announced tariffs on Canadian steel and aluminum, President Donald Trump said the government was completing a study on increasing tariffs on cars from the European Union and has threatened to impose tariffs on a number of Chinese imports.
“A potential for a trade war with China has roiled the markets recently,” said John Fraser, head of Investcorp Credit Management US, who also noted Middle East tensions and uncertainty over the UK’s exit from the European Union. “This has created increased volatility in our marketplace.”
Opportunistic repricings have faced some pushback from investors in the primary market and some deals have even been withdrawn. As coupons ground tighter, some investors including CLOs struggled to buy loans priced at 175bp over Libor, which made it difficult to pay their own fund investors.
Companies with low-priced loans that were able to cut their borrowing costs are now being punished in the secondary market. American Airlines dropped pricing to 175bp on a US$1.825bn term loan in May, but the loan was quoted in the secondary market at 98.625-99 on June 26, below its issue price of 99.625.
Volatility is good news for investors who have been waiting to pick up credits at cheaper prices, sources said. At least one trader said that activity was strong this week, but some investors said there is room for secondary prices to fall further.
At least four auctions have been held in the last two weeks to allow firms to buy loans quickly. Two Offers Wanted in Competitions (OWIC) for at least US$230m of loans were held this week after two auctions to buy more than US$270m of loans were held last week, three sources said.
An OWIC is a list of loans that buyers are seeking to purchase, which is sent to investors who decide if they want to sell some of the requested loans and at what price.
Reporting by Kristen Haunss; Yun Li Editing by Tessa Walsh