LCDX, cash loans see-saw as bid resurfaces in illiquid loan market; Wrigley, Alltel remain perched in 90s

By Paul A. Harris

St. Louis, Oct. 14 - The LCDX 10 index ended the Tuesday session at 85.55 bid, 85.85 offered, according to a market source, up nearly 3 points from the close of trading Friday at 2 p.m. ET.

The index opened the day at 89.35 bid, but eased into the high 87s by 10:45 a.m. ET, the portfolio manager said.

By 1:30 p.m. ET the index had eased into the 86s.

At 2 p.m. ET Friday, the LCDX 10 was quoted at 82.75 bid, 83.25 offered, down from Thursday's closing levels of around 84.50 bid, 85 offered.

"Last Thursday and Friday in the loan market forced sellers could not get a bid, or the bids they saw were way too low," the fund manager said.

"Today there were bids and the forced sellers hit them."

Continued big moves

Sources continued to see big moves in cash loans, and specifically pointed to the Libor plus 325 basis points term loan of Wm. Wrigley Jr. Co.

"That's the best loan out there," said the money manager.

"Anyone who is selling the Wrigley loan is doing so because they need liquidity."

Minutes from the Tuesday close the Wrigley loan was at 93½ bid, the fund manager said.

It got as high as 96 offered earlier in the day, the source added, noting that the loan was 91 offered on Friday.

"A couple of weeks ago it was 100½ bid, 101 offered," the portfolio manager recalled.

Meanwhile a trader spotted the Wrigley loan at 93 bid, 95 offered, 15 minutes after the New York close and commented that Wrigley is one of the few "solid nine-handle names" in the market, but added that it touched new lows in Tuesday trading.

Calpine Corp.'s bank loan also saw big price moves - 5 to 6 point swings - on Tuesday, according to the mutual fund manager.

Marking the Calpine loan at 74 bid, 76 offered heading toward the close, the manager said that it peaked earlier in the day at 81 offered, after opening the session at 74 bid, 75 offered.

The manager remarked that some observers who see such big price moves in bank loans, and see equivalent moves in high-yield bonds, might be drawing the incorrect conclusion that the price moves indicate an equivalent level of implied risk between the two.

However, the loan investor said, the implied risk is not equivalent because bank loans, unlike junk bonds, are atop the capital structure.

"Last week you couldn't get a bid for a high-grade bond, either," the loan investor said.

"These price moves are not telling you anything about the quality of the assets.

"They merely reflect the overall lack of liquidity in the market."

Up and mostly back down

The market for flow names was up 5 to 7 points Tuesday morning, according to a bank loan trader who added that the market gave back 3 to 5 points in the afternoon.

Generally holding in on Tuesday were the loans of Alltel Inc., according to a bank loan trader who saw it going out at 91 bid, 93 offered, off a little from earlier levels of 93 bid, 95 offered.

The trader, noting that Alltel was wrapped around 90 on Friday, said that support for the loan might be explained by the expectation that Verizon Wireless, which is acquiring Alltel, will take the Alltel loans out at par.

Also undergoing big price moves on Tuesday was the TXU Corp. bank loan, which was at 74 bid, 76 offered in the afternoon after having traded as high as 81 bid, 82 offered earlier in the day.

Libor indications

Moves on the part of central bankers and governments to shore up liquidity in the international credit markets appear to be gaining some traction, said a bank loan investor. He added that a useful indication that things were moving the right way could be found in the difference between three-month Libor and the Fed Funds overnight rate.

"Libor has dropped a lot, which is a sign that things are loosening up," the investor said, noting that it began the day in the 4.75% context, and dropped to a 4.25% context.

"The goal is to get banks lending to one another again, and it appears that the most recent moves by the central bankers have averted an absolute freeze," the investor said.

"Now it's just a recession. It remains to be seen how bad of a recession it is, and we may not know that until Christmas time."

The investor said that the spread between the Fed Funds rate and Libor narrowed by 50 bps on Tuesday.

"It used to be that a difference of 20 basis points between Libor and the Fed Funds rate was high," the investor said.

"Differences of 40 to 50 points were extreme."

"But last week the difference was over 300 points.

"Today's news is good, but there is still a lot of wood to chop."

U.S. Silica bank meeting

A Thursday bank meeting is set for U.S. Silica Co.'s $180 million credit facility, according to market sources.

BNP Paribas is leading the deal.

The deal is structured as a $145 million term loan and $35 million asset-based revolver. Price talk is Libor plus 550 basis points at 97 with 3.25% Libor floor.

Proceeds will be used to help fund the LBO of the company by Golden Gate Capital and Preferred Unlimited.

U.S. Silica is a Berkeley Springs, W.Va. producer of ground and unground silica sand, kaolin clay, aplite and related industrial minerals.

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