Coronavirus in the Credit Market | The Corona Correction | Refinitiv
Welcome to the Corona Correction Series in association with Refinitiv. I'm your host, Roger Hirst. Dave Puchowski has been analyzing credit markets with Refinitiv for over 15 years, covering a broad range of loan types, including leveraged loans. Now, before the Coronavirus scare had taken hold, there were hints from the leveraged loan market of stresses beginning to build at the margin. I asked Dave if a slowdown due to Coronavirus and the oil shock, was going to be problematic for this asset class. So the leveraged loan market, these are loans, the lower rated, highly indebted companies. It's a more insulated market and not as prone to more dramatic moves that we've seen in the stock market. But that said, we've seen the pipeline for U.S. institutional loans, as a leveraged loan sold to institutional investors. We've seen that decline to under 7 billion this week. That's an extremely low level from mid-March. And I spoke with one of our leverage reporters right before I came out with you and he's seen no new deals launched this week. So just for some reference, that pipeline had swelled to over $90 billion in the first week of February. Now, it's worth noting the pipeline had cooled off to a degree even before the Coronavirus became a larger concern in the U.S. But now, because of the virus, we've seen deeper impact. 10 deals totaling roughly 20 billion of loan buying were pulled from the market over the last two weeks. However, the deals that have remained in market, including event driven financings, we're seeing the terms shift towards investors favor during those negotiations. So the investment grade market is still open for business. I think maybe there might have been a slight pause, but by and large, that market needs a larger disruption to really, to really shake these higher rated companies coming to market to get a loan. In terms of drivers, should people be looking at the absolute levels? Because obviously benchmark yields at the government level have been collapsing, but what has been happening to spreads, particularly with the riskier tranches? The spreads have increased like I said, during negotiations. Prior to then spreads had been had been tightening. So we're probably start to see a widening trend starting now. Could this current environment combination of Coronavirus and now the oil price shock that lead to any real stress in the market, or do you think it's still a relatively safe market? You know, it all depends on how deep and how prolonged this disruption goes on for. Certainly you're going to see pockets of stress in certain areas like oil and gas. We saw secondary bids there, dropped to eighty five level overnight last night. That's the lowest level for them since 2016, which was more than the height of the last oil price crash. So we've seen leisure bids go down quite a bit, transportation, retail. Is there a timeframe over which this becomes a problem, not just for the people who got the loans out there, but the actual market of loans where the market itself will have a problem? U.S. regulators came out recently and asked the banks to you know, they they said they'd be willing to kind of look the other way. If you need to work with your left with with your borrower to get through some of these troubled times, regulators are going to give them a pass. So that's one promising note there. Now, I guess the bigger issue is, is the demand for loans. So, you know, they are floating rate instrument. And with the Fed cutting rates already and expected to cut further, we saw two billion dollars flow out of loan funds last week, according to Lipper. That was the largest outflow for the asset class in over a year. So that less demand could also make it more difficult for lower rated issuers to get finances they need. So whilst Dave outlined some clear issues within the sector, it looks like policy makers and banks have already taken steps to keep lubricating the wheels of this market. Transaction volumes have dropped with no new deals this week, indicating the shock factor of recent events. Investors are currently in the driving seat as well, with borrowers having to take the hit even though benchmark yields have fallen. But it may be the oil price impact that is the greater threat, and in particular for the lower end of investment grade, plus the high yield sector, which are most at risk from a persistently lower oil price. We'll see you tomorrow with another update.