Price of junk-rated loans in the US and Europe falls to new lows

Price of junk-rated loans in the US and Europe falls to new lows
By Paul J Davies in London
Copyright The Financial Times Limited 2007
Published: July 10 2007 03:00 | Last updated: July 10 2007 03:00


The price of junk-rated loans in the US and European markets has tumbled in the past couple of weeks as investors begin to turn away from the asset class, according to new data from S&P LCD, the market information service.

US leveraged loan prices have fallen to their lowest level in more than four years, while in the derivatives markets a sell-off has pushed the prices of both US and European loan risk to less than face value of the loans themselves.

The fall in prices is significant for banks and private equity firms preparing to launch new debt deals after recent buy-outs because it implies a rise in loan yields, which means higher borrowing costs.

Growing concerns about the level of borrowings employed by private equity and the aggressiveness of debt structures coupled with the problems in the US subprime mortgage market have sparked a crisis of confidence in debt markets.

The average price bid for outstanding loans in the US has dropped to almost 50 cents below the $100 face value used in the market from a peak in February of about $101.

S&P LCD said this was the lowest level seen in the US since May 2003 - soon after the invasion of Iraq and near the trough of the last broad bear market.

In Europe, the hot competition to buy loans, which has been driven by the flood of new managers of the complex investment vehicles known as collateralised loan obligations, has meant the average bid had been above €101 all year.

But the price has fallen 34 cents over the past two weeks, which leaves the average bid at about €100.69, the lowest level in more than a year at least.