February 27, 2020 / 11:56 PM / a month ago

Loan borrowers warn coronavirus outbreak could impact earnings

NEW YORK, Feb 27 (LPC) - Companies are warning that the fast-spreading coronavirus could disrupt operations and cut into earnings as the loan market feels the pinch from a selloff in equity markets.

Borrowers including toy manufacturer Hasbro and publisher Houghton Mifflin Harcourt warned this week that production could be impacted by a slowdown at manufacturers due to the virus, which emerged in Wuhan, China and has swiftly spread around the globe.

Some opportunistic loan financings have been pushed off amid the volatility, while the high-yield bond market has been in a holding pattern all week.

The most immediate economic impact is expected in China, but the risk of a pandemic could send ripples through financial markets globally. The virus will likely have the largest negative impact on goods and services sectors that rely on Chinese consumers and intermediary products, Moody’s Investors Service said this month.

In late January the World Health Organization (WHO) declared the outbreak of the respiratory disease a ‘public health emergency of international concern.’ More than 81,000 people globally were infected as of February 26, it said.

The Dow Jones Industrial Average has fallen more than 11% this week. The LPC 100, a cohort of the 100 most liquid US loans, dropped 46bp this week through Wednesday.

The loan market tends to react slower than equities. At least one trader said there was a bit of a ‘buyers strike’ early in the week as firms sought to determine how best to position their portfolio. Both the trader and a banker said firms have cash they are willing to put to work at the right price.

“The loan market is down half to one point this week and this will eventually ripple into the primary market,” the banker said.

The US high-yield bond market has gone four days without a new-issue this week, according to IFR, and the volume of loan deal launches was slower with a few opportunistic financings put on hold, according to two market participants.

MANUFACTURING CONSTRAINTS

Hasbro said that while it has the manufacturing capacity to meet anticipated demand this year, if the company or its suppliers suffer prolonged manufacturing disruptions due to public health conditions such as coronavirus, its manufacturing capacity could be adversely impacted, according to a regulatory filing.

Hasbro signed a US$1bn term loan in September to partially fund its acquisition of Entertainment One.

Disruption for toy companies including Hasbro could extend into the second quarter if the outbreak is not contained, S&P Global Ratings said Thursday.

Houghton Mifflin Harcourt, which refinanced in November with a US$380m term loan, said in a regulatory filing Thursday that an operational disruption to its business from factors including coronavirus could restrict its ability to supply products and services to customers.

Home decor and furniture retailer Pier 1 Imports, which filed for Chapter 11 on February 17, noted it could face a potential disruption of its inventory due to the virus.

“While factories are beginning to reopen in China, this will likely have some effect on inventory levels for the foreseeable future,” Chief Executive Officer Robert Riesbeck said in a court filing.

China prolonged the Lunar New Year holiday due to the outbreak, Reuters previously reported.

Calls to company spokespeople were not returned.

The loan asset class may remain quiet, especially for opportunistic deals, until markets seem more hospitable.

“Deals that have deadlines…will have to wait and see what the sentiment is next week,” the banker said. “We wanted to launch deals this week too, but now we’ve hit the pause button.” (Reporting by Kristen Haunss; Editing By Michelle Sierra)

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