LCDX loses 2 points as bank loan market continues to weather extreme price moves

By Paul A. Harris

St. Louis, Oct. 15 - Price moves in cash loans and the LCDX index that would once have been considered "tectonic" have lately become everyday occurrences in the leveraged loan market, sources said on Wednesday, a session that produced no primary market news.

The LCDX 10 index finished the volatile mid-week session at 83.70 bid, 84 offered, down 2 points, a bank loan trader said.

"Cash was a little weaker but the LCDX was significantly weaker," the trader said.

The index dipped as low as 80¼ bid early in the New York afternoon, according to an investment banker.

"Everything was weaker in the late afternoon," said the trader.

However, the LBO deals structured in 2008 tend to be outperforming the market, said this source and others.

Wrigley outperforming

For example, Wm. Wrigley Jr. Co.'s term loan A with a coupon of Libor plus 325 basis points was at 92¼ bid, 93 offered in the late afternoon, somewhat lower on the day, said the trader, but outperforming the rest of the cash market.

"Everything in the 90s is outperforming," said the trader, noting that the Wrigley loan has higher spreads, on a relative basis.

The recent deals have Libor floors, the trader notes, and added that those floors will presumably come back into play at some point.

"The discount rate is at 1½%, so Libor should not be at 4.3%, which it is right now," the trader commented.

"Libor should be in the 2% range. And as liquidity re-enters the market Libor rates will go down, and a Libor floor will become effective, and have value at that point."

Also in the 2008-structured deals the trader mentioned the Booz Allen Hamilton Inc. term loan B at Libor plus 450 bps, with a 3% Libor floor. It finished at 90 bid, 92 offered, unchanged on the day.

'Uncharted territory'

The loan market has lately moved into "uncharted territory," according to an official from a leveraged loan syndicate desk.

"Everything lately moves in line with equities, and the Dow was down over 700 points," the official remarked.

"It used to be that a one-point move, or anything up to a two-point move, was a 'big swing,' in the bank loan market.

"Now we're routinely seeing two-point swings in some of these names: something quoted at 76 in the morning, then at 82 in the afternoon, or vice versa."

With bids all over the place it has become very difficult to make a market, the official asserted, noting that any level can move within 10 minutes.

"Nobody expects this situation to change real soon," the source added.

The syndicate official also saw the Wrigley loan generally outperforming most of the rest of the leveraged loan market.

"Berkshire Hathaway took down $4.4 billion of subordinated notes, and put in over $2 billion of equity," the official recounted.

"Leverage on the bank loan was maybe under three times.

"And it's Wrigley: there's always demand for chewing gum. It's not something that is very cyclical."

The official also said that the loan was distributed to over 200 accounts.

"A lot of people obviously wanted to play in it."

Brocade holding in

Also holding in on Wednesday was the Brocade Communications Systems Inc.'s loan at Libor plus 400 bps, with a 3% Libor floor for 30 months, issued to help fund the acquisition of Foundry Networks Inc., the syndicate official said.

The source saw it quoted in the context of 92 bid, in thin trading activity.

Elsewhere another market source saw the Brocade loan wrapped around 90.

"The Brocade term loan went well," the syndicate official recalled, noting that it priced in mid-September at an original issue discount of 96.50, and broke to 97 bid.

A lot of the 2008 LBO deals, including Weather Channel and Fox Acquisition Sub LLC, are trading in the high 80s and low 90s, the syndicate source said, adding that they are not getting hit as hard as some of the bellwether names.

Meanwhile in the long dormant junk bond primary market, Brocade announced that it will start a roadshow next week for its $400 million offering of six-year senior unsecured notes (BB-) via Banc of America Securities and Morgan Stanley.

Up until Brocade issued a press release late Wednesday afternoon announcing the notes, some market sources had been expecting the company to do its unsecured financing with a convertible bond.

Until that release the company was, in fact, retaining the option of doing the convert. And a leveraged capital markets source said there was a buzz about a possible convertible when the company was in the market syndicating its credit facility.

However Brocade's stock (Nasdaq: BRCD) closed the Wednesday session at $3.43 per share, its 52-week low.

The market source, noting that Brocade's share price was down 53% from its 52-week high of $9.54 per share - underperforming the battered equity market - reckoned that the low share price may have had something to do with why the company ultimately elected not to go with a convert."

Continued selling

The loan market was continuing to see selling, according to a bank loan trader who spoke mid-morning on Wednesday.

"It really feels that any time a bid materializes there is a lot of leverage waiting to be unwound," the trader said.

Around 10:45 a.m. ET the trader saw the LCDX 10 at 83.80 bid, 2 points lower from Tuesday night's close.

As with others who spoke later in the day this source pointed to the Wrigley loan as a "resilience" story in the loan market, and spotted the paper at 93½ bid, 94½ offered.

"It's holding in very well," said the trader.

"I think this is the best loan in the market from a company standpoint, and from an asset coverage standpoint.

"It's a good deal, and it's still holding in."

At that point, however, the loan paper of Alltel Inc. was at 90½ bid, and had been hit a little, said the trader who spotted it down 1½ to 2 points.

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