Leveraged Loans Lose 10 Percentage Points in 3 months
According to an article in Yahoo Finance last week, $40 billion in leveraged loans are reportedly taking a dive. The loans, tied to more than 50 companies, have lost at least 10 percentage points of face value in just three months, according to Bloomberg data. Some have dropped a lot more, with lenders lucky to get back just two-thirds of their investment if they tried to sell.
As of last Tuesday, the biggest losers, included energy, healthcare and communications companies, according to Bloomberg:
Amneal Pharmaceuticals LLC (AMRX CUSIP: 03168L105) – $2.7 billion loan due 2025 has sunk to about 80 cents on the dollar,
Seadrill Operating LP (SDRL CUSIP: G7998G106) – $2.6 billion loan maturing in 2021 fetches around 53 cents.
Deluxe Entertainment Services Group Inc. – first-lien loan dropped as much as 77 cents in three months to 12.5 cents — more than $600 million and consequently filed for Chapter 11 bankruptcy.
According to Bloomberg, energy has been hit the hardest with $12 billion of loans reportedly falling more than 10 cents on the dollar.
Apparently lenders and credit raters are losing patience with the slowing economy, according to the article. Millions of dollars were reportedly borrowed in order to fund private equity buyouts, dividends and other transactions that, unfortunately, didn’t improve earnings.
Some of the drops track the slide in a borrower’s financial fortunes, and some were made worse by downgrades to the CCC bucket by ratings firms.
Collateralized loan obligations (CLOs) are groups of loans that asset managers package into bonds. Most CLOs can’t hold more than 7.5% of their portfolios in loans rated CCC, and once they are downgraded below a certain ratings threshold, money managers are forced to sell.
CLOs are reportedly the biggest holders of loans of junk rated companies, and the market has grown substantially in the last few years as investors are searching for higher yields, Speculation is rising about how the structures owning so much of corporate America’s debt will function with more downgrades and a possible recession.
According to the article, it’s not a “full-blown apocalypse for the junk-rated leveraged loan market, which totals $1.2 trillion,” but it may reflect possible “latent market risk, as speculation about a recession spurs investors to flee shaky names.”
Leveraged loan worksheet is reportedly updated automatically and may differ from results cited in this article.
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