NEW YORK (LPC) - The secondary loan prices of US food producers and processors are falling as retaliatory tariffs by China on US agricultural products raise fears of a trade war that will hit economic growth and jobs.
Average bids for food and beverage loans in the US secondary loan market have tumbled 200bp since March to 98% of face value, according to Thomson Reuters LPC data, when President Trump unveiled his tariff plan. The drop is the biggest decline among all US sectors, the data shows.
Secondary loan pricing is also weakening overall as trade tensions rattle through the markets. The SMi100, an index that tracks the 100 most widely held US loans, fell to 98.4 on Wednesday from 98.62 on March 1 and is now 54bp lower than 98.94 on February 7, the highest point in 2018 to date, according to Thomson Reuters LPC data.
“[The trade conflict] is reverberating through the market,” a trader said. “It’s why equities are down and loans are following suit.”
Trump’s imposition of tariffs on US$50bn of Chinese imports on June 15 sent shockwaves through the financial markets and caused a sell-off in global risk assets. Beijing retaliated with a 25% tariff on 659 US products including soybeans, pork and seafood, starting July 6. The shares of agricultural commodities also fell sharply, with soybeans dropping to their lowest level since December 2007, Reuters reported.
Last week China included pork, fruit and nuts in the tariffs to be imposed on July 6, after previously including them on April 2, Reuters reported. This means that US pork now faces cumulative Chinese import duties of 71%, excluding value added tax, and fruit faces a 50% levy.
The food and beverage sector is seeing sharp losses because the tariff risk added to the existing operating factors such as higher freight and labor cost that are weighing on US agribusiness, said Chris Johnson, a director at S&P.
“It doesn’t surprise me that the loan market is pricing in more risk,” Johnson said. “Export markets often act as a support mechanism for pricing [of agricultural products].”
Some protein processors could also face margin pressure as a drop in beef and pork exports would lead to excess domestic supply and weaker domestic wholesale prices, Johnson added.
CTI Foods, a company that provides custom products to the food service industry, including raw and pre-cooked protein, and dehydrated beans, has seen its US$345m term loan B drop about four points since March to 86.75-89 on Wednesday. The company’s ratings could be pressured from any unforeseen margin pressure from tariffs, S&P said in a report.
Seafood company High Liner Foods’ US$300m term loan fell to 96.5-98 on Wednesday from 101 before March. B&G Foods’ US$650m term loan B has fallen to around par from a 101 trading range in February.
The trade spat is escalating as the two countries make tit-for-tat tariff threats. China’s next set of tariffs is expected to target US energy and healthcare products, Reuters reported.
The growing prospect of a prolonged trade war is likely to generate more volatility and sector weakness in the US leveraged loan market, as the food manufacturing equipment sector and the broader manufacturing sector are also expected to be affected.
“The impact on leveraged loan and high yield issuers could obviously be more acute given the leveraged nature of their businesses,” said Jon Poglitsch, head of credit research at Highland Capital Management. “Outside of the obvious effects in certain areas of commodities, it appears that companies involved in the industrial, medical equipment, and auto supply chain sectors are among those most likely to be impacted.”
Reporting by Yun Li. Additional reporting by Kristen Haunss; Editing by Tessa Walsh and Michelle Sierra