Loan market anticipates rising tide from Fed's bond facility; Landry's trades above par

By Paul A. Harris

Portland, Ore., April 9 – The Federal Reserve Bank's latest action, aimed at bond issuers whose investment-grade credit ratings hang in the balance due to the economic impact of coronavirus, is expected to create a rising tide throughout the credit markets, a loan syndicate banker said on Thursday.

The badly beaten-up leveraged loan market is expected to be lifted on that tide, the syndicate official added.

On Thursday the Fed announced of the creation of the $75 billion special purpose vehicle, part of its previously announced primary market corporate credit facility, which will target bonds that had investment-grade ratings of at least Baa3/BBB- on March 20, but have since slipped, owing to economic circumstances related to Covid-19, to no lower than speculative grade Ba3/BB-.

The move had an immediate and massive impact in the junk bond market, sources said.

It was also felt in leveraged loans, the syndicate banker said.

Par loans got a decent bump on Thursday, according to the banker who added that lower credit quality loans that did not benefit from earlier Fed actions, got a nice lift as well.

The new Landry’s Finance Acquisition Co. Libor plus 1,200 basis points senior secured first-lien term loan due October 2023 traded north of par on Friday, the source said.

The $250 million deal printed earlier in the week at 96, coming 200 bps below the 1,400 bps spread talk.

The X-factor, as to how Thursday's Fed action will impact the loan market depends upon how it will impact the CLOs, the banker said.

What will rating agencies do?

To a certain extent the “deeply distressed bank loan market” is yesterday's story, a loan investor said late Thursday.

Double B rated loans that had traded down to a range of 80 to 84 moved up to 90 to 95 in a week, the investor said, and added that although the cheapness of the market is suddenly swimming into view, suddenly there aren't many offers.

The selling that the loan market underwent had largely to do with retail funds, the investor said.

The CLOs, which represent around 70% of the market, don't have to sell.

“Things are structured, in this market, so that the CLOs don't have to sell,” the source asserted.

Lately mutual funds stopped selling, the investor added.

“Nobody is selling, now.

“People think things are cheap.”

With respect to the CLOs, one of their big problems is that their baskets for owning lower-rated loans are full.

Meanwhile, throughout the market those lower-rated loans–especially those in the triple C category–remain in search of a bid.

What could compound the problem is pending actions of the ratings agencies as they downgrade borrowers due to the ravages of the coronavirus pandemic upon their balance sheets and businesses.

That could make the already full-to-the-brim triple-C baskets of the CLOs and even bigger problem, the investor said.

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