| NEW YORK
NEW YORK Feb 15 US investors are assessing the
volatile secondary loan prices of companies that are being hit
by technological disruption as textbook publishers join
specialty retailers and oil and gas companies on a growing list
of sectors facing long-term 'secular' change.
The secondary prices of textbook retailers, such as Cengage
Learning, fell to 92-95% of par or face value in early 2017 as
the sector faces increased competition from ebooks, rental and
used secondary markets.
This dip follows steeper falls in specialty retailers such
as department chain Neiman Marcus and womenswear retailer Ascena
Retail, which are battling internet shopping models. Neiman
Marcus is trading below 80% of face value and investors are
evaluating positions and sector exposure.
"We are looking at all our retail names to see the impact
from online competition," said an investor at a Collateralized
Loan Obligation (CLO) fund.
Secondary pricing volatility shows no sign of abating for
companies under pressure from technology. Some oil and gas
companies are still trading at stressed and distressed levels
after the sector was hit by increased supply from new fracking
technology and low oil prices two years ago.
Efforts to value technologically challenged companies are
playing out in the secondary market as companies with
covenant-lite loans are generally unable to increase pricing on
existing primary loans or refinance.
"When companies undergo secular change, the loans become
more volatile. But there is more opportunity," a loan portfolio
Would-be buyers and sellers are haggling over secondary
market valuations as investors switch into intense active
management and consider whether to ride out the volatility or to
reduce positions while hedge funds and more aggressive bank loan
and high-yield asset managers circle.
"We have been investing selectively in some stressed and
distressed areas," said Trey Parker, portfolio manager and head
of credit at Highland Capital Management.
Textbook publishers are feeling the chill after industry
leader Pearson lowered 2017 profit guidance on January 18.
McGraw-Hill Education's term loan fell from par bid to 94.5-95.5
on January 18 but recovered a point to 96-96.75 by February 14
after the company's guidance on February 8.
Publishing company Houghton Mifflin Harcourt's term loan was
93.25-94 on February 14 and Cengage's term loan hit 91-92.25 on
February 7 before recovering to 93.25-94.25 on February 14.
Retail remains the most depressed sector in credit,
according to S&P with 18.6% of distressed companies, totaling 19
firms on January 17, up from 14 on November 15, as consumers
continue to swap to online operators that allow buyers to easily
compare prices, and millennials shun malls and choose to spend
Poor sales results from several bellwether retailers in
January prompted investors to start cutting their exposure to
retailers with large brick-and-mortar footprints, and fashion
retailers with exposure to discretionary spending.
Neiman Marcus' term loan has fallen 8 points since the start
of the year to 79-80 on February 14 and women's apparel
specialist Ascena Retail's term loan dipped nearly 7 points to
90.5-91.5 at the same time. Sporting goods seller Academy Sports
& Outdoors' term loan has lost 10 points this year to 82-84.
Oil and gas companies have had longer to adapt to their new
reality and pressure is easing. The sector has a distress ratio
of 12.2%, according to S&P, and 22 impaired companies.
Oil prices are much improved from US$30 a barrel a year ago
but Goldman Sachs is projecting benchmark U.S. crude to stay in
the US$50 range for the next two years, far removed from over
US$100 per barrel in June 2014.
Offshore drilling company Seadrill's term loan was trading
at distressed levels of 74.75-75.5 on February 14 but is up
sharply from around 35 in December 2015. Exploration and
production (E&P) company Fieldwood Energy's second-lien term
loan also traded at 75.5-77.5 on February 14.
While technological change is expected to ripple through
most sectors, few are expected to be hit as hard as the yellow
pages sector, which saw its business model wiped out by the
internet, starting in 2007. Newspaper publishers were also hit
hard by the decline in advertising revenues.
Newspaper publisher Tribune, which piled on nearly US$7.4bn
in term debt during its leveraged buyout in 2007, filed for
bankruptcy in 2008 but remains in the loan space via its legacy
companies, broadcaster Tribune Media and newspaper publisher
Tribune Media refinanced US$1.76bn of term loans in January
and paid down US$400m of the roughly US$500m non-extended term
loans in February. Tronc had US$385m of term loans as of
September 2016, according to the company. Tribune's term loan
traded at 100.5-101.25 and Tronc's term loan at 100-101 on
(Reporting by Lisa Lee; Editing By Tessa Walsh)