The value of leveraged loans fell to record lows during the past week, creating further potential mark-to-market losses for both investors and banks.
The average bid on the most traded US leveraged loans dropped 330 basis points to an all-time low of 84.28 per cent of face value, according to data from Standard & Poor’s LCD and Markit.
The average bid for Europe’s most traded leveraged loans fell to its lowest level in seven months but, across a broader range of loans, the average price also fell to a historic low.
Leveraged loans are those secured on assets generally to speculative grade borrowers and used primarily to finance buy-outs by private equity funds.
Loan market prices reached never before seen lows in February as a result of forced selling as falling prices led to the unwinding of market value-linked structures holding loans, which further exacerbated the downward spiral in prices.
This left loan investors licking wounds and some banks that mark to market – mark their books according to the market value of the assets – having to make further writedowns on their leverage loan books in their first-quarter 2008 earnings.
Since the rescue of Bear Stearns in March, prices in the loan market had recovered as funds stepped in to pick up bargains.
But last week’s global financial turmoil also hit the loan market and threatens to create further losses.
Simon Hood, joint head of leveraged loans and mezzanine debt at European Credit Management, said: “With renewed volatility in the stock market and concern about the economic situation, a dawning of reality that the economy will get worse has taken over and we have seen a drift downward of prices, accentuated by recent events.”
The spread between the price at which traders were quoting bids and offers nearly doubled, indicating a level of uncertainty and illiquidity not seen since last August when the credit crunch hit.
Mr Hood said buyers were sitting on the sidelines awaiting stability before investing.
He said: “We are seeing some senior secured debt trade below 50 cents and some of the flow names [most traded loans] in the low-80s, which is extraordinary, presenting a buying opportunity”.
The average bid of most traded European loans fell 197 basis points, closing at 86.31 per cent, based on pricing from Markit.
LCD’s broader composite of loans fell to a new record low of 84.47 per cent, marking the sharpest weekly decline in six months, according to LCD.
While the fall in loan prices threaten losses for banks that mark to market, banks’ funding needs are the main concern, according to Matt King, a credit strategist at Citigroup, particularly as much of the backlog of leveraged loans that had been weighing on banks has been reduced.
SIVs remain stormbound
A sale of about $630m of the assets of a collapsed complex structured vehicle has highlighted that the value of this kind of mortgage-backed debt remains heavily distressed, writes Anousha Sakoui.
Investors face losses of 75 per cent of the value of the once top-rated debt they bought issued by the Mainsail II structured investment vehicle, which fell into receivership after the credit crunch led to a fall in the value of its asset portfolio.
KPMG, the receiver, pressed ahead with an auction on Thursday illustrating investors’ eagerness to dump toxic assets, even at low prices, on expectations valuations would not improve.
After indicative bids of about 20 per cent of face value on Monday for the securities, 12 banks bid 16.35 per cent at the auction, according to a person familiar with the sale.
Investors holding senior debt can hope to recover just over 25 per cent of the original investment by cashing out of the vehicle.
The investors were described by one person close to the restructuring as treasury departments of some leading US companies and government entities.
Some 45 per cent of the $1.4bn face value of the portfolio of assets were sold at the New York auction.
It is the third in a series of auctions held as part of a restructuring of five SIVs, holding about $18bn of assets, that collapsed as a result of the credit crunch.
Mainsail II, a $1.4bn vehicle originally run by Solent Capital in London, was in April placed under the control of KPMG receivers who agreed in August to a restructuring arranged by Goldman Sachs.
Investors in the vehicle had a range of options, including taking a cash pay-out or reinvesting in a new vehicle through a so-called pass-through note.
The assets not sold will be transferred to a new vehicle set up by Goldman Sachs, which will issue the pass-through notes.
By Anousha Sakoui in London
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