Coronavirus weighs on US leveraged loan market

NEW YORK, Jan. 27 (LPC) — Concerns over a coronavirus outbreak weighed on the $1.2 billion U.S. leveraged loan market on Monday, as secondary prices edged lower amid volatility on markets.

Prices for leveraged loans to businesses that could be hit by an outbreak, which was first identified in Wuhan, China, fell by about half a point to one point, traders said. travel-related industries being the hardest hit. The overall market was down about an eighth to a quarter of a point, they estimated, though at least some of that pressure may be due to a slew of revaluations that have come into the market to take advantage of a rise in loan prices in January.

“Smaller, lower-quality credits, which are at the epicenter of the outbreak” are coming under pressure, one of the traders said. “More generally, people want to see what the market is doing. There is no panic.”

The LPC 100, a cohort of the most widely traded loans, fell last week as fears of an outbreak spread, falling to 99.05 on Friday from 99.18 on January 20. The benchmark hit a more than two-year high of 99.12 on Jan. 16.

The Dow Jones Industrial Average fell more than 1% in trading Monday on concerns over the fallout from a coronavirus outbreak. The Centers for Disease Control and Prevention (CDC) said the respiratory disease had five positive cases in the United States on Monday with 73 more tests pending. There have been more than a thousand confirmed cases in China, the CDC said.

While U.S. equity markets often feel an immediate impact, the U.S. loan market is generally less responsive, a third trader said, although negative sentiment may have some impact on loan trading and potential repricing proposals.

POSTPONEMENT

Electronic market maker Jane Street Group has postponed a scheduled call Monday in light of current market conditions, Morgan Stanley told potential lenders, according to two additional sources.

The company is seeking to extend the maturity of a senior B term loan of approximately US$1.5 billion to January 2025, Refitiniv LPC previously reported. Morgan Stanley, Bank of America and JP Morgan are arranging the financing.

Although the call was postponed, the deal itself was not postponed, according to a fourth source. Jane Street may want to hold the lender’s call on a day when markets are less volatile, the source said.

Spokespersons for Jane Street and Morgan Stanley declined to comment.

As loan prices improved this month, a number of companies took advantage and came into the market to reduce their interest payments. Revaluations may put pressure on collateralized loan obligations (CLOs), the biggest buyers of leveraged loans, and some in the market have attributed any potential pause in buying to the influx of opportunistic revaluation trades .

CLOs can be constrained by loan repricing because, because they receive less interest for loans after a company repricing, the fund still has to pay its own investors a pre-set rate.

“Some super aggressive trades can be put on hold for a bit, but anything that is performing can always be re-evaluated,” the second trader said.

More than 35% of the market is trading above par, or 100 cents on the dollar, which is usually when a company will look to cut interest payments. At the end of January 2019, only 1.68% of companies were trading above par, according to LSTA/LPC MTM Pricing.

“We went up so much that we had to go back anyway. That’s a perfect reason to sell, but I don’t think anyone is panicking yet,” the second trader said.

Priscilla C. Carnegie