February 27, 2020 / 2:52 PM / in a month

Virus fears creep into leveraged loan market

LONDON, Feb 27 (LPC) - Fears over the spread of the coronavirus has hit sentiment in the European leveraged loan market, prompting German gas firm Messer to scrap its repricing deal and the biggest decline in secondary prices since the 2016 Brexit vote.

A sharp jump in virus cases in Italy, South Korea, Japan and Iran has triggered a global stock market sell-off. While the loan market is typically insulated from wider macro-events, volatility caused by pandemic fears has fuelled uncertainty over supply-chain issues and borrower exposure to a growing number of affected areas.

Messer became the first European casualty, calling off plans to lower the margin on an existing dual-currency term loan.

The repricing, which comprised a €540m term loan B and a US$2.2bn term loan, was supposed to cut 50bp off euro-denominated loan and 25bp off the US dollar loan that the company raised in October 2018.

“It was an opportunistic trade based on good market conditions, but when those conditions change it is hard to complete the deal,” a banker said.

Confirmed cases of coronavirus now span close to 50 countries and in areas such as northern Italy, a lockdown has been imposed. Growing fears over the pandemic have rocked the global economy, and in the loan market has lowered investors’ risk appetite.

Appetite for opportunistic loans is likely to fall. Repricings and dividend recapitalisations, which have dominated Europe’s loan market so far this year, are expected to be reserved for only the strongest of credits as the market bases decisions on credit fundamentals as opposed to market technicals.

The change in sentiment could also affect pricing on new money deals, which are already being syndicated in the market, such as a €1.61bn term loan B to back Dutch equipment rental firm Boels’ €614m acquisition of Finland’s Cramo, which was launched at 300bp-325bp guidance.

“Market sentiment isn’t great now and it’s obviously tough to do a repricing,” said a leveraged finance head. “We’ll see whether we need to widen the pricing to complete the launched deals.”

UNDER SCRUTINY

While the secondary market hasn’t shown panic selling across the board, Europe’s top 40 leveraged loans have recorded the biggest drop in more than 3.5 years, Refintiv LPC data shows.

Average bids on Europe’s top 40 leveraged loans plunged 24bp on Wednesday to 97.95, the largest daily drop since the day after the Brexit referendum vote in June 2016 when it fell 66bp.

“We see some selling, but it’s not a one-way street or disorderly. While some will see whether this is an opportunity to add names, others will obviously have more concern about what the outbreak means,” said a loan trader in London.

The kind of government intervention announced in Italy would impact in particular businesses such as retail, gaming, events, restaurants and lodging, hospitals, cinemas, cruise operators, gyms and theatres, Edward Eyerman, head of leveraged finance at Fitch Ratings, said.

If similar actions are taken in the UK, France and Germany — core leveraged loan markets — then risks to the asset class could grow materially.

“The sub-sectors exposed represent about one-third of Fitch’s European leveraged credit portfolio,” Eyerman said. “If it’s just a few days, or even weeks it’s not a problem. But what if it lasts for a quarter or more?”

Some investors have already started reviewing potential impacts to their portfolio by putting individual names, especially those with Asian links, under close watch.

UK theme park and attraction operator Merlin Entertainments, which partly owns Legoland in Korea and Malaysia; Chinese consortium-backed Amer Sports and UK-based event organiser Clarion Events, which generates more than a quarter of its revenue from China and Hong Kong, are all trading down.

Loans in Amer Sports and Merlin fell to 96.95 and 99.375 of face value this week, respectively, the lowest level since the buyout loans freed to trade last year. It was Merlin’s first time trading below par.

“Amer Sports held an investor call last week. People are concerned about its China exposure, like what sales come from the country and how much is being sourced from there,” a loan investor said.

No one knows just how big the impact could be and how much disruption to supply chains could occur if the virus lasts longer, adding to investors’ anxiety.

“The problem is when you start looking at every company to sort out the impact, it’s just like falling down a rabbit hole,” said the loan investor. “You just don’t know.” (Editing by Claire Ruckin and Chris Mangham)

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