European prices fall through the floor

The market for European debt assets is being dramatically, suddenly and comprehensively deleveraged, plunging prices for loans and bonds through the floor.

Drops of 15 to 20 points for performing bonds and loans were far from unusual last week – unprecedented declines for performing credits.

Ineos, which straddles the bond and loan markets, saw its 7.875% bonds fall below 35 and term loan B&C paper fall to 59–73 from 72–75 at the start of the week.

ProSieben opco loans, meanwhile, were seen at 50% of face value on Friday, down from 66 in under a week, while Europecar‘s fixed rate bonds were as low as 35, despite a coupon of 8.125%, and UPC loans were seen at 75, giving mezzanine-like return for performing senior loans.

By the end of the week there was evidence of demand for high-quality names putting some kind of floor under bonds from the likes of Wind, Bombardier and Fresenius and recent vintage loans such as those from Expro (seen Friday at 97 bid) and Tunstall (at 90 bid, down from 95 two weeks ago), but even those names were off savagely.

Unlike earlier phases of the credit crunch, it is now possible to buy assets in size in secondary with no fear of lifting the price.

The iTraxx Crossover index, which measures the cost of CDS protection for the most traded high-yield bonds, gapped wider through the week then surged dramatically between Thursday’s close of 6.785bp and Friday’s opening level of 733.5bp. It continued to rise through much of the rest of the day before dropping back to close near to the opening level at 727.50–732.50.

The LevX Senior loan index was even more badly beaten down, falling as low as 84 on Thursday, having closed at 95.75 on Monday.

Two linked trends are now glaringly obvious. One is the dramatic plunge in demand for credit assets, as investors who are themselves leveraged sell the market, transferring assets to the remaining far smaller, far less liquid cadre of unleveraged investors – made up of some hedge funds and a few distressed debt investors.

The other is the spiralling cost of protection for those who do buy, a manifestation of something close to absolute risk aversion for many in the market. With many funds unable to buy loan assets below 80, the benefit to be had from falling prices offered no rewards anyway.

The collapse in confidence in equity markets, which gathered pace throughout the week, was the undoubted catalyst for the credit sell-off, but the market had some unique issues to exacerbate the problem, not least the forced selling of loan portfolios associated with the collapsing Icelandic bank sector.

The results were cash loans and high-yield bonds falling 15 or even 20 points as the week progressed, and bid-offer spreads opening up dramatically.

On the forced seller front, Babson was out early in the week with a BWIC (bids wanted in competition) auction list for a €200m portfolio, but the process was shelved, apparently after finding an internal solution. Later in the week three leveraged loan portfolios held under TRS programmes for Icelandic banks Landsbanki and Glitnir were put up for auction and did generate sales.

In all, somewhere in the region of €1.6bn to €1.8bn of assets are reported to have been sold into the falling loan market last week, though given the off-screen, private way the market operates it is actually very difficult to track volumes and some loan traders were sceptical that such liquidity was really generated.

One indicator of how rapidly the market for assets collapsed in the later part of the week was seen when the price for the LevX Sub index of subordinated debt was higher than the senior index.

The danger now is that the TRS unwinds already seen have driven down prices to the point where they trigger further TRS unwinds from solvent sellers, deepening the crisis and plunging prices lower still.

One thing is now certain: the secondary markets may find some kind of floor in the coming weeks if banks and equity markets begin to stabilise, but primary activity for high-yield bonds or loans is now unthinkable.