Low Secondary Loan Prices Highlight Weak Sectors

LONDON (Reuters) – Low secondary loan prices in Europe are highlighting sectors where lenders face increased default risk and heavy potential losses, research from Thomson Reuters LPC shows.

Secondary loan prices remain depressed after a widespread selloff last October, following the collapse of Lehman Brothers, and are now averaging 64.8 percent of face value, the data showed.

Sector trading performance has shown a strong divergence in recent months as investors sold to reduce exposure, particularly to the troubled automotive and construction industries, and bought into the more defensive telecoms, healthcare and food and beverage sectors.

The automotive sector is the weakest performing sector in the secondary loan market with senior debt bids averaging only 22.7 percent of face value, the data shows.

This indicates decreased recovery prospects for senior debt holders and very limited recovery for junior debt holders, traders say, and some of these issues are already starting to crystallise. German car parts maker Edscha has filed for insolvency and is likely to be auctioned. Its second lien loan, which has a second claim on the company’s assets, is trading at 1.3 percent of face value, according to TRLPC data.

The subordinated or junior mezzanine loans of other auto sector peers, such as Visiocorp [VSOCP.UL] (formerly known as Schefenacker) and Autodistribution [ATDST.UL], are trading at one and two percent of face value respectively, the data shows. The construction sector has the second-weakest loan trading profile after the collapse in Europe’s real estate market. The debt of construction companies debt is averaging 34.2 percent of face value, 30.5 points lower than average bids of 64.79 percent, the data shows.

These low bids again show investors’ expectations of vastly reduced recovery rates. Junior lenders’ precarious position was emphasised last week by Crest Nicholson’s [CRTNC.UL] debt-for-equity swap proposals, which offered a token amount to subordinated lenders.

Crest Nicholson’s second lien and mezzanine loans are now bid at 0.5 percent of face value, while its senior term loans are bid at 10 percent, according to TRLPC data.

Heavily cyclical industries that are battling global customer destocking, such as the general manufacturing industry and the chemicals sector, are seeing average bids of less than 50 percent of face value at 48.7 and 49.8 percent respectively, according to the data.

UK polymers manufacturer British Vita’s mezzanine loan is bid at 1.3 percent of face value after the company defaulted under its loan credit default swaps. Ineos Group’s loans also remain under pressure pending a quarterly trading update at the end of February.

Businesses reliant on consumers’ reduced discretionary spend are trading just above 50 percent of face value, but are still underperforming average secondary bids.

Leisure and entertainment companies’ debt is trading at 52.7 percent of face value, media companies are at 53.6 percent and retail and supermarket operators are at 54.7 percent, the data shows.

Only three sectors are outperforming average secondary bids, as investors try to shore up portfolios with stronger performing credits.

Telecoms companies’ debt is performing most strongly at 68.5 percent of face value, followed by food and beverage companies at 67.7 percent, and healthcare companies at 66.2 percent, according to the data.
(Reporting by Zaida Espana; editing by Tessa Walsh & Simon Jessop)