Photographer: Krisztian Bocsi/Bloomberg

Loans Face Test as Secondary Pricing Sounds a Cautionary Note

Early borrowers in Europe this year will be hoping that investors in the leveraged loan market prove as eager to lend and as compliant on pricing as they were during the closing months of 2017.

But some of the loans that priced late last year have not traded up strongly in the secondary market, and this could signal a warning to the next wave of companies hoping to lock in cheap rates on their debt.

Fourth Quarter Fade

Weaker secondary demand for European leveraged loans priced in 4Q17

Source: Bloomberg

Based on BVAL bids where score is 7 or higher for EUR/GBP term loans

The current average bid for credits priced in the fourth quarter is below par, at 99.85, whereas those priced in the first half are bid on average above par. This could simply be the result of year-end fatigue -- and overall investor appetite for the yield offered by leveraged loans should remain strong while interest rates are low.

But the combination of some sluggish secondary levels on recent deals plus a wave of upcoming supply that includes large M&A financings, makes a plateau in new-issue pricing more likely than an immediate continuation of the tightening trend that dominated the fourth quarter.

The closing months of 2017 brought a series of deals to the primary market that were very tightly priced, driving new-issue spreads to a post-crisis low. These deals also carried loose lender protection in their documentation. Apparently investors haven’t yet decided that they want those deals badly enough to be willing to pay a premium in the secondary market.

Post-Crisis Low

Primary European loan spreads fell to E+361 by December 2017

Source: Bloomberg

EUR 1L term loans, single B and unrated

(Ruth McGavin is a leveraged finance strategist who writes for Bloomberg. The observations she makes are her own and are not intended as investment advice.)

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