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Coronavirus weighs on US leveraged loan market

By Kristen Haunss

By Kristen Haunss

NEW YORK, Jan 27 (LPC) - Concerns over an outbreak of the coronavirus weighed on the US$1.2trn US leveraged loan market Monday, with secondary prices dipping slightly amid volatility across markets.

Prices on leveraged loans to companies that could be affected by an outbreak, which was first identified in Wuhan, China, were down about a half-point to a point, according to traders, with travel-related industries hit the hardest. The overall market was down about an eighth to a quarter of a point, they estimated, though at least some of that pressure may be due to a slew of repricings that have come to market to take advantage of a January rally in loan prices.

“Smaller, lower-quality credits, that are at the epicenter of the outbreak” are feeling pressure, one of the traders said. “More broadly, people want to see what the market does. There is no panic.”

The LPC 100, a cohort of the most widely traded loans, fell last week as fears of an outbreak spread, dropping to 99.05 Friday from 99.18 January 20. The benchmark hit a more than two-year high of 99.12 January 16.

The Dow Jones Industrial Average fell more than 1% in trading Monday on concerns over the fallout of a coronavirus outbreak. The Centers for Disease Control and Prevention (CDC) said the respiratory illness has five positive cases in the US as of Monday with another 73 tests pending. There have been more than a thousand confirmed cases in China, the CDC said.

While US stock markets often feel an immediate impact, the US loan market is typically less reactive, a third trader said, though negative sentiment may have some impact on loan trading and potential repricing proposals.

POSTPONEMENT

Electronic market maker Jane Street Group postponed a call scheduled for Monday in light of current market conditions, Morgan Stanley told potential lenders, according to two additional sources.

The company is seeking to extend the maturity of an approximately US$1.5bn first-lien term loan B to January 2025, Refitiniv LPC previously reported. Morgan Stanley, Bank of America and JP Morgan are arranging the financing.

Despite the call being postponed, the deal itself has not been postponed, according to a fourth source. Jane Street may want to hold the lender call on a day when markets are less volatile, the source said.

Spokespeople for Jane Street and Morgan Stanley declined to comment.

As loan prices improved this month, a number of companies have taken advantage and come to market to cut their interest payments. Repricings can put pressure on Collateralized Loan Obligations (CLOs), the largest buyers of leveraged loans, and some in the market attributed any potential pause in buying to the influx of opportunistic repricing transactions.

CLOs can be constrained by loan repricings because as they receive less interest for lending after a company reprices, the fund must still pay its own investors a previously set rate.

“Some super aggressive transactions may be on hold for a little bit, but anything performing can still get repriced,” the second trader said.

More than 35% of the market is trading above par, or 100 cents on the dollar, which is typically when a company will look to cut interest payments. At the end of January 2019, just 1.68% of companies were trading above par, according to LSTA/LPC MTM Pricing.

“We’ve been up so much we were due for a pullback anyway. It’s a perfect reason to sell, but I don’t think anyone is panicking yet,” the second trader said.

(Additional reporting by Aaron Weinman in London.) (Reporting by Kristen Haunss. Editing by Michelle Sierra and Jon Methven)