To think it was less than three months ago that we wrote that “leveraged loan demand is off the charts as dangers mount.” Since then, a lot has happened in the credit market, with yields and spreads blowing out in credit in a much delayed response to said mounting dangers and turmoil in the equity market, eventually hitting the leveraged loan market too, where as we wrote last week, loan prices have fallen precipitously as loan funds suffered dramatic redemptions in recent days, most notably the Blackstone leverage-loan ETF, SRLN, which last week saw its largest ever one-day outflow since its inception.
Fast forward to today when while credit appears to have found a shaky, tentative floor over the last few days, leveraged loans – which started falling later than other markets this quarter – are still sliding, and as long as funds keep pulling money out, will probably keep falling.
While floating-rate loans tend to track bonds, they are often slower to react both to the upside and downside. Since Oct. 1, loans have lost about 2%, including a 1% drop this month, while both high-yield and investment grade bonds rose slightly. In fact, since we last checked in on the S&P/LSTA lev loan index last week it has fallen another full point, and is now down to 95.4, its lowest price in over two years.
“It’s a bit of a catch up,” James Schaeffer, deputy CIO at Aegon Asset Management told Bloomberg. “Aggressiveness – on terms and structure – has created more price volatility than in the high-yield market, now that we’ve seen demand for loans slow a bit.”
That’s putting it mildly: as we noted last week, JPMorgan had to slash the price on a $210 million loan to 93 cents on the dollar from par to sweeten investor demand and help finance a private jet takeover. This represented one of the steepest discounts seen in the leveraged loan market this year. And with the market on the verge of freezing, the size of the deal was cut by $70 million from the originally targeted amount. Meanwhile, in Europe, the market appears to have already locked up, as three loans were scrapped over the last two weeks. To wit, movie theater chain Vue International withdrew a 833 million pound-equivalent ($1.07 billion) loan sale. While the deal was meant to mostly refinance existing debt, around 100 million pounds was underwritten to finance the company’s acquisition of German group CineStar.
More deals were pulled the prior week when diversified manufacturer Jason Inc. became at least the fourth issuer to scrap a U.S. leveraged loan. Additionally, Perimeter Solutions also pulled its repricing attempt, Ta Chen International scrapped a $250MM term loan set to finance the company’s purchase of a rolling mill, and Algoma Steel withdrew its $300m exit financing. Global University System in November also dropped its dollar repricing.
Worse, there is no sign the pain will end in the near term as there has been a significant exodus from loan mutual funds and ETFs in recent weeks, and the market is braced for more: on Thursday afternoon, Lipper reported that US Loan Funds just saw a record $2.5 billion outflow in the past week.