Leveraged Loan Prices Poised to Fall for Sixth Week on Greek Debt Crisis
Leveraged loan prices in the U.S. are poised to fall for a sixth consecutive week, led by Caesars Entertainment Corp., the world’s biggest casino operator, and First Data Corp. amid concerns that Greece may default and signs of a slowing economy.
The Standard & Poor’s/LSTA U.S. Leveraged Loan 100 index has declined for 12 consecutive days to 94.32 cents on the dollar in a six week slump not seen since December 2008 and the longest daily losing streak in almost five years. Caesars $3 billion term loan declined this week by 1.36 percent to 89.66 cents on the dollar, according to data provider Markit Group Ltd. A $4.3 billion loan for First Data Corp., the credit card processor acquired by KKR & Co. in 2007, fell by 0.51 percent to 92.33 cents this week.
The decline underscores that senior secured loans are also not immune from investor fleeing from all assets but the safest government bonds as the European Central Bank tries to contain a sovereign debt crisis. Confidence is also eroding on signs that the expansion of the world’s largest economy has slowed.
“Everybody’s eyes are on the Greek contagion,” said Adam Vengrow, head of credit sales and trading at Cantor Fitzgerald & Co. in New York. It’s putting “leaky and gradual pressure” on loans, he said.
Caesars, formerly known as Harrah’s Entertainment Inc., was taken private by Leon Black’s Apollo Global Management LLC and David Bonderman’s TPG Capital for $30.7 billion in 2008. Its term loan is also the biggest decliner since the end of April, falling 4.17 percent, according to Markit. First Data’s debt declined by 2.73 percent since the end of April.
High-yield, high-risk loans are rated below Baa3 by Moody’s Investors Service and lower than BBB- by S&P.
Greek Austerity Plan
Greek Prime Minister George Papandreou is trying to rally support for austerity plans aimed at preventing a sovereign default after European Union talks on a new bailout plan stalled, and worries grew that its debt crisis could spread.
Moody’s Investors Service said it may cut the rating of France’s biggest banks, BNP Paribas SA and Societe Generale SA, because of their investments in Greece. The yield on the Greek 2-year bond topped 30 percent for the first time yesterday, while the cost of protecting the country against default climbed 280 basis points to a record 2,050 basis points, according to prices compiled by CMA.
Americans’ views on the economy soured in June amid worries about unemployment, inflation and the slump in housing, according to the Bloomberg consumer comfort report. Confidence among factories also eroded as manufacturing in the Philadelphia region contracted unexpectedly this month.
Macroeconomic factors that are being priced into risky assets have worked “all the way” into an asset class that is senior secured, said Otis Casey, a director and loans market analyst at Markit Group Ltd.
The amount of retail cash flowing into loan funds slowed to the lowest level in 40 weeks, according to a June 15 research report from Bank of America Merrill Lynch.
Mutual funds tied to bank loans had $113 million of inflows last week, while high-yield bonds had outflows of $545 million, an earlier Bank of America report showed.
“As the market grapples with weak economic data in the US and turmoil out of peripheral Europe, fund flow trends in high yield have seen a marked shift in sentiment recently, with U.S. high-yield mutual funds recording outflows in the prior two weeks,” Oleg Melentyev and Mike Cho, analysts at Bank of America, wrote in a June 15 report.
Loan inflows this week increased to $196 million, while high-yield “saw very large outflows” of $1.3 billion, the analysts said in a report yesterday.
“A Healthy Improvement”
A total $311 billion of leveraged loans have been raised so far this year, up from $169.5 billion during the same time last year, according to data compiled by Bloomberg.
“The adjustment we’ve seen in the loan market in the last few weeks actually is a healthy improvement,” said Rob Dial, a managing director at New York Life Investments. When “issuers are trading at rich prices, like in the first quarter, we don’t feel like we’re getting value,” he said.
The S&P/LSTA U.S loan index, which tracks the 100 largest dollar-denominated first-lien leveraged loans, reached a high this year of 96.48 cents on Feb. 14, as inflows into bank loan funds was surging. Mutual fund inflows became “very strong” in December and continued to pick up “dramatically” in January and February, said Dial, adding that the capital pouring into the asset class did not “match up with the available new issue.”
Cumulus Media Inc. is seeking $2.4 billion in loans to help finance its acquisition of Citadel Broadcasting Corp. and to refinance debt, a person with knowledge of the matter said earlier this week.
Dole Food Co. said June 13 that it’s seeking $1.25 billion in loans to refinance its existing senior secured credit lines, while Cellular South Inc., a wireless communication provider, is also seeking $800 million in loans for a refinancing.
Returns this year to leveraged loan investors have fallen to 1.87 percent, from about 3 percent at the end of April, according to the S&P’s loan index. Historically, the loan market has returned about 5 percent, said Markit’s Casey.
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