LONDON Feb 7 (Reuters) - Hedge and credit funds that have invested in European leveraged loans are set to reveal deep losses in January results after heavy falls in the secondary trading value of the loans, senior bankers said on Thursday.
“January is going to be very hard. I have heard some horrendous numbers that will be out soon,” a head of loan syndication said. “I know it’s going to be bad - as bad a performance as ever seen in credit. The great unknown secret is about to be revealed.”
The price of European secondary loans has slumped this year. The thin and fragile market has been overwhelmed by a wave of selling that is escalating as the falling value of loans trips investors’ sell triggers.
The average bid on Europe’s Top 40 leveraged loans breached 90 percent of face value for the first time on Wednesday, hitting a record low of 89.90, according to Reuters Loan Pricing Corp data.
The drop below the 90 threshold is triggering forced sales into a weak market by investors running mark to market vehicles. These include hedge funds that are having to unwind Total Return Swap programmes and repay bank funding lines, and long-only credit funds and other asset managers.
“Anyone with any mark to market exposure has fundamental problems. When these structures were put in place, no-one envisaged that performing debt would be trading at 90 or lower,” a senior European fund manager said.
Leveraged loans fell four percent in January from mid-90s levels and are 5.6 percent down for the year to date. This brings investors losses to 11.6 percent since the height of the credit boom last February, when loans traded at around 101.50.
January’s four-point loss however is magnified by leverage of around three to five times supplied by banks to their loan investors.
“If you are losing four points in January without leverage - how much more do you lose of your equity using leverage? The multiplier effect as the pricing comes down destroys returns,” a senior trader said.
Few fund sellers have been identified in Europe to date other than Elgin Capital, which suspended NAV calculations on its Corporate Credit fund in December which was worth less than $300 million. Elgin has been reducing its positions over a number of months and now has few active bets.
Banks have however been conducting portfolio sales on behalf of unidentified clients in the last couple of weeks to liquidate CLO warehouses and unwind Total Return Swap programmes and fears of more to come have been keeping buyers away.
Merrill Lynch auctioned a 350 million euro portfolio last week, which hit confidence and prices, and talk of another 200 million euro portfolio sale this week at distressed levels in the 70 range pushed secondary prices down further.
Banks and funds are bracing for bad news in the next couple of weeks as January results trickle in and expect heavy losses and closures on the fund side.
“I suspect a number of funds that have got things wrong will quietly disappear,” said one fund of hedge funds executive who declined to be named.
For a story on falling European loan prices seen boosting some banks’ write-downs, please double click on [ID:nL05346104] (Reporting by Tessa Walsh, additional reporting by Laurence Fletcher; editing by Sue Thomas)