"Leveraged Loan Market Freezes As Prices Plunge, Four Deals Pulled"
From ZeroHedge:
After both investment grade and high yield bonds got crushed in the
past month with spreads blowing out to multi-year wides and generated
negative YTD returns as Morgan Stanley now sees the bear market gripping credit accelerating into 2019, many traders were wondering how long before the final bastion of the credit bubble - leveraged loans - would also pop.
It appears the answer may be "now" because as Bloomberg reports, no less than 4 leveraged loans have been pulled this month as a result of the turbulence gripping the broader credit market, the highest number of pulled deals since July when five deals were pulled. Expect more to come.
This comes as the price on the S&P/LSTA U.S. Leveraged Loan 100
Index has plunged since the start of October, when it was just shy of
par, to 97.28, the lowest price since November 2006!
Diversified manufacturer Jason Inc. became at least the fourth issuer
to scrap a U.S. leveraged loan this month according to Bloomberg, which
writes that the company had kicked off the syndication process on its
amend and extend on Nov. 13 was seeking commitments from new lenders by
Nov. 20.
Additionally, in the last two weeks, Perimeter Solutions 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 last
week also dropped its dollar repricing, but successfully completed a
repricing of its euro tranche.
Prior to this string of deals getting shelved, the last pulled loan
deal seen was Apergy’s $395m loan repricing in late October. Before that
there hadn’t been a scrapped transaction in the market since late
August.
The shift in market dynamics from sellers to buyers was on exhibit
last week, when eight loans flexed wider while none flexed down - the
first week when no borrower friendly changes were made since at least
August.
Leveraged loans hitting a brick wall is bad news for CLO investors -
the biggest source of leveraged loan demand - who should position
themselves higher in quality in the face of late-cycle credit risks,
credit curve steepening and spread widening, Morgan Stanley write in its
2019 outlook report on the CLO market.
According to MS analysts Johanna Trost and James Egan, the focus of
the market will shift from technicals to fundamentals - the same
argument noted by Adam Richmond in his broader credit outlook for 2019 - warnings that the risk/reward for CLO equity doesn’t look favorable against the late-cycle backdrop as "cash
distributions have been trending lower and liquidation values are 10x
exposed to deteriorating loan pricing and loan losses."...
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