February 7, 2018 / 11:59 AM / 11 days ago

LPC-Secondary loans drop after stock sell-off

LONDON, Feb 7 (Reuters) - Europe’s top 40 leveraged loan composite dropped almost a quarter of a point since Friday in response to the brutal global sell-off in stocks.

Europe’s top 40 leverage loans were quoted at 99.8% of face value on February 6, down from 100.03 on February 2. The composite dropped to 99.96% on Monday, before experiencing a 16bp drop on Tuesday, the biggest single daily drop since June 2016 following the Brexit vote, according to Thomson Reuters LPC.

Britain’s major share index posted modest gains but remained at ten-month lows on Wednesday. The FTSE 100 was up 0.6% at 7,185 points by 0903 GMT. British shares lost ground for the previous six sessions and are down 6.4% so far in 2018.

Europe’s loan market is typically slower to react to wider volatility, however this latest wobble shows an awareness from loan traders that this is late cycle and conditions have been very toppy, loan bankers said.

“The senior loan market by virtue is senior secured and floating rate. It has been relatively sanguine on market volatility because it’s not equity. At the same time if loan bankers are doing speculative transactions they should be more cautious right now,” a syndicate head said.

After low volatility throughout 2017, the latest correction is expected to be welcomed by the loan market, which has been trading on technicals for over a year.

The latest drop in the top 40 continues slight softening in the composite seen towards the end of 2017 as some investors sold out of loans and shuffled portfolios to make room for new January issuance.

Softening was also caused as individual names struggled including recently refinanced leveraged loans for French telecom group Altice and its majority owned telecoms company SFR, as shares in the group fell. A drop in these names of over 3 points, compressed average bids on Europe’s top 40 composite, which closed off 2017 at 99.65 on December 29.

POSITIVE TECHNICALS

Despite the recent softening, technicals are still set to dominate Europe’s secondary loan market.

“Clients are still hungry for assets and positive technicals remain in place. There are more CLOs printing and there is a lot of appetite for paper, so in loans it is unlikely that the price movement will go further. While more volatility is expected in equities, the loans market should be pretty protected from it,” a senior credit trader said.

Increasing inflation expectations and rising bond yields have taken their toll on equity markets. While the fixed income bond market could face a further battering, it is expected that the loan market will continue to push ahead relatively unaffected in comparison.

“The issue has been that people thought there may be inflation, which means bond prices go down and that wobble impacts the equity markets. It is a much bigger wobble in the fixed income world than it is for floating products,” the syndicate head added.

Editing by Christopher Mangham

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