While everyone is out popping the corks on the bubbly because the interbank loans aren’t screaming “the end is nigh” quite as loudly, the leveraged loan market has gone off the cliff. When this crisis started, banks got caught with billions in loans they had planned to sell off. By not making new loans and slowly syndicating the back inventory, banks have tried mightily to reduce their exposure. But prices continue to drop, and eventually the banks will have to take even more write downs on this paper.
The Financial Times reports that last week things got really ugly.
In Europe, the average price of the most commonly traded large leveraged loans to companies such as Alliance Boots, Ineos, NTL and United Biscuits saw its biggest weekly drop, according to S&P LCD, the market information service, and Markit Group.
The US market for such debt, which is mainly used for private equity buy-out deals, has also suffered big falls in recent weeks as hedge funds and other market value sensitive investors have become forced sellers.
Analysts do not expect the picture to improve in the near term because falling prices for loans and other risky assets lead banks to force hedge funds and other investors who use borrowed money to put up more cash in so-called margin calls or sell holdings…
“A vicious circle of redemptions, margin calls and further redemptions can only make us nervous on [loan and credit] spreads in the short run,” said Peter Goves, Citigroup strategist. “While funds in equities probably have plenty of cash on hand at this point to cope with redemptions, in credit we are not so sure.” He added that a normalisation in loan and credit markets was only possible once so-called real money – or non-leveraged – investors saw value in such stressed prices no matter how bad the economic outlook.
The US loan market saw its worst losses nearer the start of October, when the price of loans to companies such as Celanese and Charter Communications dropped from more than 90 cents in the dollar to the low 80s and the high 70s respectively in a matter of days. Loans to Ford Motor have dropped from 65 cents to 42 cents this month, according to data from Markit.
Investors put out requests for bids on portfolios of loans worth $2.28bn this month alone, according to S&P LCD, which compares with a total of $471m for all of the third quarter.
In Europe, the average price dropped 7.2 cents in the euro to 73.32 cents according to S&P LCD, more than double the previous week’s decline and the biggest weekly drop yet seen.
NOW WATCH: Money & Markets videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.