European Secondary Loan Prices Breach 70%

LONDON (Reuters) – European secondary loan prices breached 70 percent of face value for the first time on Monday, reaching new record lows of 68.76 that continue to inflict pain on mark-to-market investors, according to RLPC data.

The low secondary loan prices reflect heavy forced selling by stressed investors that has also weighed on the battered LevX index of leveraged loan credit default swaps.

Around three billion euros of forced sales have flooded the thin and illiquid European secondary loan market in the last two weeks, several traders said.

The sales started with Icelandic banks’ portfolio sales and other European banks followed, but a portfolio sale from Sankaty last week marked a new phase of the selloff as managers of credit-driven collateralised loan obligation (CLO) vehicles started to throw in the towel, traders said.

Traders said Sankaty, the credit affiliate of private equity firm Bain Capital, put a $342 million portfolio of leveraged loans up for sale last Wednesday and fund manager Highland Capital followed in the United States with a $641 million portfolio of U.S. and European names.

Average bids on Europe’s top 40 leveraged loans have lost 225 basis points from last Friday’s level of 71.01 percent of face value to 68.76 on Monday, RLPC data shows.

The LevX index showed signs of a small improvement on Monday following a speech by U.S. Federal Reserve chairman Ben Bernanke, while two traders said that investors were covering their shorts.

The index closed at 84.7-85.95 on Monday, after trading as low as 82 on Friday, traders said. At levels of 85, the series three LevX senior index implies a yield of 1,394 bps, one trader said.

The yield is nearly twice that of the Xover iTraxx index of 50 mostly ‘junk’- rated names, which tightened slightly from record wides of 787 basis points in late afternoon trading.

This marks an inversion of the traditional relationship between the two indexes and means that investors are paying nearly twice as much for loan protection as bond protection although loans have stronger recovery prospects as senior secured instruments.

“The LevX and crossover levels are completely illogical — the relationship doesn’t make a ton of sense. That leveraged loans could be twice as risky as high yield bonds seems a bit nuts,” a LevX trader said.

Deep mark-to-market losses in loans in the cash and synthetic markets are expected to trigger further loan sales. October has already seen the heaviest monthly drop in average prices of 1,308 bps, RLPC data shows.

Trading was subdued on Monday, an investor said, as the market worried about further price drops. “There is clearly room to go down further,” the trader said.

However, good quality names in defensive sectors remained sought-after, another trader said.

“People are trying to buy any telecom or any credit considered solid that is trading around 60,” the trader said.

By Zaida Espana