LCDX loses 4.35 points; traders see Wrigley term loan hold; Earthbound Farm launches $185 million

By Paul A. Harris

St. Louis, Oct. 9 - The bank loan market traded sharply lower during a Thursday session which played out against a backdrop of free-falling stock prices and dire headlines in the financial pages.

The LCDX 10 index sustained a 4.35 point drop.

Cash loans traded 3 points lower. However the loan paper of Wm. Wrigley Jr. Co. demonstrated resilience, sources said.

AMG Data Services reported $239 million of outflows from bank loan mutual funds for the week to Oct. 8, according to a market source.

Meanwhile in the primary, Earthbound Farm was heard to be in the market with a $185 million credit facility via RBC Capital Markets.

LCDX drops 4.35

The LCDX 10 index fell by a whopping 4.35 points on Thursday, according to a trader, who spotted it at 84¼ bid at the close, with a spread to Treasuries of 960 basis points.

The index began its downhill tumble when the news services began trumpeting the misfortunes of the Republic of Iceland, which was widely reported to be teetering on the verge of bankruptcy, the trader recounted.

"The LCDX started falling when it was rumored that the Icelandic banks, which are being taken over, were launching a couple of auctions," the source said, adding that there also rumors of auctions from hedge funds.

All told, $1.3 billion of loan paper was possibly on the block, the trader said.

"Once that happened, all of the European banks went short the LCDX 10, figuring it was going to fall," the source added.

2007 versus 2008

This trader and others remarked that while cash loans were generally lower on Thursday, loans which financed 2007 era LBOs, structured with loose covenants and high leverage, fared worse than the more conservatively structured 2008 LBO financing loans.

Loan paper of TXU Corp. and First Data Corp., both backing 2007 era LBOs, were trading in a context of 72 to 74, one bank loan syndicate official said, speaking on the telephone 90 minutes before the New York close.

The same was true of Harrah's Entertainment Inc. and ServiceMaster Co., sources said.

Meanwhile the more recent vintage LBO loans, such as Fox Acquisition Sub LLC and Weather Channel were trading in the high 80s, the syndicate official said.

"There is nothing but selling going on," the official added.

At the close another trader saw the First Data loan in the high 60s, quoted at 69 bid, 72 offered.

The TXU B-2 term loan tranche was at 73 bid, 74 offered, this trader said.

Wrigley resilient

"Wrigley has kind of held on in the low 90s," the trader added, spotting the more recent vintage LBO-backing loan at 93 1/8 bid, 93 7/8 offered.

Another trader saw the Wrigley loan at 92½ bid, 93½ offered on Thursday morning, and added that it went out Wednesday at 93 bid, 93½ offered.

"Two days ago that was trading at 95," the trader said.

"The recent deals seemed to be priced a little better, and came with structures that were a little better."

Still later, another trader asserted that Wrigley definitely outperformed the bank loan secondary on Thursday.

"It's a pretty solid credit," the source said.

"There are definitely people out there willing to hide in Wrigley.

"It's hanging in, in a 92 bid, 93 offered context, off 1 point to 2 points."

GM down 6½ points

Elsewhere the General Motors Corp. loan dropped by 6½ points on Thursday, according to a trader who spotted it at 47 bid, 49 offered.

The downward move came as the wire services were reporting that GM stock, which fell 31% Thursday, closed at its lowest price since March 1950, $4.76 per share.

"GM can't survive unless people have credit," the bank loan trader contended.

"If GM doesn't give people credit, people can't buy cars.

"How many people pay cash for their cars?"

In light of the big downward moves in both the leveraged loan market and the stock market, Prospect News asked this trader whether the two were becoming unusually correlated.

No, the trader said.

"When things go down like this everything goes down. But I don't think that's a correlation.

"The credit markets are seizing and equities are down.

"But you will see differences. Equities could be up 500 tomorrow, but the credit market could stay right where it is."

A vicious cycle

Thomson Learning traded a lot on Thursday, according to a trader who spotted it in a 69 bid, 71 offered context at the close.

"Late last night it was a couple of points higher," the trader added.

"Mostly people were selling wherever there was a bid.

"A lot of people are just looking for a bid."

This source said that undoubtedly forced selling was taking place on Thursday.

"This round of price decreases might trigger more funds into forced selling because of collateral or margin calls," the trader said.

"It could turn into a vicious cycle."

Prospect News asked this trader whether, in light of such dramatic downward price moves in assets such as Thomson Learning and TXU, distressed players might be getting ready to pounce.

"One guy told me they are keeping an eye out," the trader answered.

"But the short-term mark-to-market pressure makes them hesitant.

"You might have a great opportunity, but the downside risk is probably greater than the upside risk."

Earthbound Farm launches

Meanwhile there was scant news in the primary market.

Earthbound Farm launched a $185 million credit facility via RBC on Wednesday.

Tranching and price talk were unavailable as Prospect News went to press Thursday evening.

Proceeds will be used to fund the LBO of the San Juan Bautista, Calif.-based organic produce company by Lindsey Goldberg.

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