March 12, 2020 / 4:36 PM / 2 months ago

Secondary prices plummet as virus grips market

LONDON, March 12 (LPC) - The European and US secondary loan markets have plummeted to their lowest level in years, wiping value off fund portfolios and putting a halt to any primary activity as the coronavirus rushed toward pandemic status and oil prices dropped sharply.

Average bids on Europe’s Top 40 leveraged loans dropped to 93.99 this week, the lowest for eight years since January 31 2012, when the Top 40 composite was at 92.37, according to Refinitiv LPC data.

In the US, the LPC 100 dropped to 93.21, the lowest level since 93.15 on October 11, 2011. The steepest decline occurred on oil and gas loans where average bids dropped over the week by around 8.3%. Other sectors saw notable declines, with hotels down 4.1%, leisure down 4.2%, retail and restaurants down 3.8%, transportation down 2.8% and manufacturing down 2.6%.

Average bids on loans held by BDCs showed a dramatic fall. Based on roughly US$18bn in BDC loans that have mark-to-market pricing, the average bid dropped to the 88 context, down from 92 last week and from 94 at this time last year. Meanwhile, middle market loans bids slipped to under 95 for the first time since 2016.

“It has been a rollercoaster and on Monday it was 2008 all over again. Whatever central banks are doing it doesn’t address the spread of the virus. People are alarmed and panicky and some companies are more affected than others. We are in uncertain and unchartered territories right now,” a senior investor said.


Activity in the secondary loan markets increased amid a volatile environment and a compression in prices led some investors to exit assets while others viewed it as opportunity to buy and bulk up.

In Europe, four portfolios of loans emerged over the past week. The first was a €220m shopping list from ICG on what it wanted to buy, the second a €118m disposal of assets from Invesco, the third was a €70m disposal of assets from Ellington and the fourth was a €195m disposal of assets from an unknown seller.

While ICG bought a number of assets on March 6 at a discount to where they had been trading last month, prices dropped even further on March 9.

“It didn’t look so good as they bought a ton of stuff on Friday in the OWIC and then prices dropped further on Monday,” the senior investor said.

Europe’s Top 40 leveraged loans rose a fraction on March 10 to 94.56 from 94 on March 9, prompting some investors to start buying paper, for fear they had missed the bottom of the market. However, the composite fell further on March 11 to 93.99.

“A couple of people bought on the bounce and now wish they had waited,” a senior banker said.

Invesco decided to sell a bulk of loans via a Bids Wanted In Competition process and bids were due on the €118m portfolio by March 11.

The BWIC comprised 21 names, denominated mainly in euros with some sterling and average bids were 93.9, according to LPC data.

Some of the larger positions included €10m of German packaging company Kloeckner Pentaplast; €10m of French cyber-security business Exclusive Group; and €10m of Nordic payments technology group Nets.

Ellington’s BWIC comprised 19 names, denominated in euros and had an average bid of 92.4, according to LPC data. Bids were due by March 12 and the largest position included €6.3m of Israeli cyber surveillance firm NSO Group.

The fourth BWIC comprised 47 names across a number of tranches, denominated in euros, with bids due by March 13.

It is unclear how much genuine interest the BWICs got as investors were not clear whether to buy or wait in case prices fell further. Pricing a loan has become tricky and unpredictable in current market conditions as everyone tries to guess where rock bottom is.

However, BWICS can be used as pricing exercises to mark a book’s value.

“A lot of the BWICs will be a pricing exercise as no one is putting out firm bids. Some things should sell but you can also do a BWIC to mark your book. There is a lot of confusion as no one knows where pricing should be,” a trader said.


Any deals in primary are on hold after three loans that allocated last week on Europe’s secondary loan market fell in early trading as part of a wider shift downwards in the secondary market.

French flooring and interior finish company Gerflor allocated a €850m buyout loan on March 6 at 99.5 OID and was quoted at 96.5 this week, while chemical group Polynt-Reichhold allocated a €539m-equivalent dual-currency refinancing on March 5 at 98.5 OID on the euro, which was quoted at 97 later in the week.

A €500m tranche of a wider financing backing the acquisition of Australia-based cancer and cardiac service provider Genesis Care closed on March 4 at 99 OID and was quoted at 97 later in the week.

The immediate drop in secondary has curtailed any thoughts of launching new processes which bankers have already underwritten and are waiting to syndicate.

Some €520m of loans backing private equity firm Ardian’s acquisition of Cerelia was being early birded to see what level it could launch at.

Even if interest margins widen from where lenders initially thought they would bring the loan, they are unlikely to have enough flex to offer an OID discount that can reflect secondary market levels.

“The best thing any underwriter can do at the moment is sit and wait,” a second senior banker said.

Just this week, French laboratory services group Biogroup LCD postponed a €274.7m acquisition loan due to adverse market conditions. The postponement may not bode well for a €1.61bn acquisition loan by Dutch equipment rental firm Boels, which was supposed to price on March 10 but is yet to do so, sources said. (Editing by Christopher Mangham)

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