By Lisa Lee
LONDON, Oct 8 (Reuters) - Average bids on US and European
secondary loan prices have fallen in the last two weeks as the
market grapples with global growth concerns and credit issues
that are hitting the oil, mining and auto sectors.
The average bid in the SMi100 index of the 100 most widely
held US loans has fallen 63 basis points (bp) to 98.21 percent
of face value since September 22, tracking widening high-yield
bond prices, according to LSTA/Thomson Reuters LPC data.
In Europe, the average bid on the top 40 most actively
traded leveraged loans has dropped 31bp in the same time to
99.42 percent of face value, the data shows.
China's slowing economic growth caused global volatility
across the markets in September which dragged commodity and
energy prices lower and had a knock-on effect on emerging
markets, which are closely correlated to commodities and
particularly oil.
Demand for loans is weakening in the US, which market saw
heavy outflows last week, with $786 million withdrawn from loan
funds and $2.15 billion from high yield bond funds in the week
ending September 30.
The European loan market has seen less effect due to
continued demand from Collateralised Loan Obligation (CLO)
funds.
"The US market has traded off more than Europe right now.
The US is more technical than Europe with more short term mutual
funds and is more susceptible to weekly fund flows," a leading
London-based fund manager said.
The decline in secondary prices points to a rise in primary
loan pricing, which is starting to be seen in the US as
investors call for higher margins to compensate for increased
risk. Several opportunistic primary deals have been pulled in
the US this week and pricing has flexed higher on several loans.
SECTOR SPECIFIC
Problems surfacing in the auto and healthcare sectors are
also prompting greater caution. Volkswagen's VOWG_p.DE
widening scandal over emission tests has hit the secondary
prices of auto component suppliers. The average bid in the auto
sector dropped to 98.25 on October 6, from 98.92 on September
22.
In the healthcare sector, investors are wary of politicians
taking aim at drug prices after Democratic candidate Hillary
Clinton criticised biotech companies' high prices.
A letter by U.S. Democratic lawmakers attacking Canadian
drugmaker Valeant VRX.TO for "massive" price increases on two
heart drugs pushed Valeant's around 200bp lower.
Tranches C, D and E are trading at 97.75-98.25 while the F
tranche traded at 98.125-98.625 on Tuesday, loan traders said.
The average bid in the healthcare sector softened to 98.19 as of
October 6, down 45bp in the last two weeks.
"It's generally risk-off and there's sector-specific issues
in commodities, oil, health and autos," a loan trader said.
Weaker US demand for loans is also due to slowing issuance
of CLO funds in addition to heavy outflows from the asset class
after the Federal Reserve's decision to keep interest rates at
near-zero, which is reducing the appeal of floating rate loans.
"It's a really tough market tied to global uncertainty. This
is leading to a slowdown in CLOs, which is a lot of the reason
we're seeing (US) loans start to weaken given the outflows," a
loan investor said.
Although secondary loan prices are lower, they have been
less volatile than the high-yield bond markets. The US bond
market has dropped more than 2.5 points in the past three weeks.
The Merrill Lynch High Yield Master II index fell to 92.72
on October 6, which is slightly higher than an annual low of
91.67 on October 2, but still well below 95.37 on September 15.
"The high yield market in particular has struggled.
Specifically, we are concerned about rising default rates in the
high yield energy sector and stress from declining profits and
deteriorating free cash flow," said Nuveen Asset Management's
Bob Doll.
Sustained weakness in the high yield market could foreshadow
further stock market declines and also suggests correlated
vulnerability for the loan market, which is prone to cross-asset
selling pressures, particularly for weaker credits.
"Weaker credits are more correlated with equities," the
London-based fund manager said.
(Editing by Lisa Lee)