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LONDON, March 23 (Reuters) - Average bids on low-yielding loans are dropping on Europe’s secondary loan market as investors push back from tightly-priced paper.
Strong investor demand for paper has led to a dramatic erosion of yield in Europe’s leveraged loan market within the space of a few weeks. Swedish home alarm company Verisure’s refinancing loan allocated earlier this month at 300bp, marking an historic low since the financial crisis.
This week a number of credits including French telecoms company SFR, Swiss medical diagnostics company Unilabs and European medical laboratory services operator Cerba Healthcare have all tightened margins to 300bp.
A number of investors across the board, including CLOs and credit funds are starting to push back against the drastic cut in pricing, opting to reduce and in some cases decline the deals in primary syndication.
“Arrangers thought they could print ever-tighter pricing. At syndication if they move from 325bp to 300bp, have dropped off quite significantly,” an investor said.
This is impacting secondary trading levels, offering some relief to a market that has been on a relentless upward trajectory since the third quarter of 2016.
SFR’s €1.145bn term loan B11 softened on the break, with the bid dropping below par to as low as 99.5% of face value on Thursday morning, according to Thomson Reuters LPC data. The loan allocated on Wednesday evening at par.
Cerba was bid at 99.875% on Thursday morning, while Unilabs was bid at 99.25%, according to traders, after also allocating at par on Wednesday.
“An increasing number of funds are saying no, they are drawing a line and not going to 300bp and that is what is causing the under performance,” a senior loan banker said.
The move is the first sign of a break in trading patterns since January, which saw a majority of loans trade up on the break and continue to trade higher.
“In the past everything was strong on the break and performing well and that’s not the case this time round,” the investor said.
Investors who opted to remain in the tighter priced deals received larger allocations than expected and are now struggling to sell out in secondary, the senior loan banker said.
Investors began to push back after pricing continued to drop, irrespective of ratings and credit quality.
"Cerba is a B1/B+, while Unilabs is a B3. Cerba has one leg in a slightly better rating and Unilabs has one leg in a slightly worse rating so it does not make sense that they should price on top of each other," a second senior leveraged finance banker said.
Lower-yielding telecoms names have also slipped in secondary, including Irish telecoms company Eir, which recently repriced its €1.6bn term loan to 325bp over Euribor.
Eir’s term loan was bid at 99.9% of face value on Wednesday, softening from 100.3% on Tuesday.
“ are being a bit more diligent on what they want to put in their books yield-wise,” said a trader.
Tight yielding primary issuance is pushing some investors to take a renewed interest in existing names on secondary.
Despite some existing credits being bid at 102, investors are once again buying them if they pay over 400bp, in a bid to find yield.
“We’ll look at anything with a four handle, even if we are paying crazy prices on secondary for it,” a second investor said.
The secondary loan market has also softened across the board due to a broader sentiment shift across global markets.
Europe's top 40 leveraged loan composite softened to 100.75% on Wednesday, from a high of 101.5% of face value on March 7.
Editing by Christopher Mangham