April 22, 2020 / 4:12 PM / 2 months ago

Opportunistic trades dominate Europe's secondary loan market

LONDON, April 22 (LPC) - Europe’s secondary loan market has seen prices rebound from an eleven-year low after hedge funds and par buyers profited from an oversell, while some opportunistic portfolio sales also hit the screens.

Loan pricing plummeted in mid-March, driven by the coronavirus pandemic and plunging oil prices, knocking millions of dollars off portfolios and halting any new primary loan issuance.

However, average pricing on leveraged loans has risen dramatically over the past few weeks after the market was viewed to have oversold on a vast range of credits, attracting a swathe of buyers looking for value.

Europe’s top 40 leveraged loans were quoted at 92.25% of face value on Monday April 20, compared to an eleven-year low of 78.76% on March 19, according to Refinitiv LPC data.

In mid-March, opportunistic hedge funds led the way on the buying spree and bought a wide variety of credits in the 60s and 70s, pushing pricing up to the 80s. More mainstream investors followed suit and focused buying in the 70s and 80s to push those credits up to the 90s.

“Loans plummeted and people thought it was silly. Some of the names will struggle but there were others that overcorrected, which will be ultimately fine and not lose money. Therefore, a lot of names that were marked lower are now up 10 to 20 points. While it was hard to get hold of anything in any meaningful size, there were enough trades to make the prices go up,” a senior banker said.

While some money came from more obvious opportunistic buyers such as Apollo, Centerbridge, SVP and Angelo Gordon, some funds surfaced that were relatively unknown in Europe including Cross Ocean Partners and Searchlight Capital Partners.

“Clearly there were a few names I’d never heard of surfacing and buying. Now our paths have crossed and this is what hedge funds do so it’s not really a surprise,” a senior investor said.

With secondary market prices having adjusted higher, it seems as though the opportunistic trade is over. The market has regulated itself, several traders said.

“People buying in the low 80s are not going to buy in the low 90s as the pull to par is not as spectacular, so there is an extent to which that trade has happened. It does demonstrate the significant amount of capital available, looking for a good risk return,” the senior banker said.

While some opportunistic buying took place on a vast number of leveraged loans, other loans remained at deflated levels, especially for borrowers or sectors that were either struggling prior to Covid-19 or as a result of the global pandemic.

“Certain names are justifiably beaten up in price and there is not a two-way flow,” the investor said.

BWIC ACTION

Credit asset management boutique Capital Four is selling a €113m portfolio of loans via a Bids Wanted In Competition process, which had a deadline of 2pm UK time on April 22. It comes after bids went in on April 17 for a €30m BWIC from asset manager Chenavari.

Capital Four’s BWIC contains 30 names across a number of tranches, denominated in euros, sterling and dollars and had an average bid of 76.7% of face value, according to Refinitiv LPC data.

Average bids were dragged down by the likes of struggling retailer Pronovias, which is quoted at 27.5% and Belgian perimeter security specialist Praesidiad at 48.4%.

It is unclear whether Capital Four’s portfolio will clear, this is the second BWIC issued by the manager in the past few weeks in a move similar to other managers such as Invesco and Alcentra that brought BWICs and didn’t sell due to lowball bids, only to bring them back a few weeks later.

“Cap4 tried to sell a bunch of stuff before, about four weeks ago, and not much of it traded but then it remerged,” the investor said.

Four names out of 15 in Chenavari’s €30m BWIC traded at the end of last week.

“Some sellers are not desperate and more opportunistic portfolios are emerging such as Chenavari’s,” the investor said.

Capital Four was not immediately available to comment. Chenavari declined to comment. (Editing by Christopher Mangham)

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