LCDX closes up slightly at 99.15; Hanes, Leap active in secondary; Fairchild Semiconductor brings add-on

By Paul A. Harris

St. Louis, April 21 - The bank loan market edged higher Monday although sources characterized the session as a quiet one, with the ranks of participants thinned by the Passover observance.

A loan trader marked the LCDX at 99.15 bid at the close, up 0.05 bps on the day.

Active names included the term loans of Hanesbrands Inc. and Leap Wireless International Inc., though both were unchanged on the day.

A money manager from a high yield mutual fund, whose portfolio includes both leveraged loans and high-yield bonds, noted on Monday that the loan market has been seeing a huge rally.

"People are wondering whether it is possible for loans to go from a context of 88 to a context of 94 or 95, the money manager said, noting that the higher levels might represent fair value, at least on an historical basis.

"I have to believe there is a pause somewhere along the way," the source warned.

Hanesbrands, Leap active

Sources saw secondary market activity in a pair of names, Hanesbrands and Leap Wireless, although in neither case had prices moved.

A syndicate official reported very light volume on Monday.

"Everything felt relatively firm, but cash loans were probably unchanged on the day," the source said, adding that there had been no credit-specific activity.

The source saw moderate volume but no real movement in Hanesbrands which reported in its earnings call that profits had tripled in the first quarter of 2008.

The official also saw activity in the Leap Wireless term loan, which was trading in a 98½ bid, 99 offered context, at Monday's close, unchanged from where it went out Friday.

A necessary step

Earlier in the session the mutual fund money manager also saw the Leap loan trading at 98½ bid, 99 offered, and took a moment to marvel at the price.

"It's a necessary step," the investor commented.

"When the bank loan market starts getting back to par banks can actually start loaning again."

The source reflected that Leap had a covenant violation related to the release of their financials.

"They had to bump the coupon to 300 from 200," the money manager said.

"Now everybody is obsessed with the potential for Leap and MetroPCS to merge, which presumably would lead to the bank loan being paid off.

"But it right now it seems priced as though the announcement has already been made."

When Prospect News objected that Leap and MetroPCS, which offer local cell phone service at much lower prices than the national carriers, is a story that the capital markets seem to like in a slow economy, the investor went along, but only so far.

"Nobody has a problem with it," the money manager said.

"It's fine for the loan to be high priced.

"But if they don't merge it's a B2 credit with a 300 handle, in the 98½ bid, 99 offered range, which puts in pretty much on the overvalued side."

Fairchild add-on

The Monday session produced scant news from the primary market, sources said.

Fairchild Semiconductor International Inc. will hold a bank meeting on Tuesday for a $100 million add-on to its Libor plus 250 bps term loan (Ba2/BB-).

The reoffer price remains to be determined.

Bank of America and JPMorgan are leading the deal.

The South Portland, Maine, semiconductor company will use the proceeds plus cash on hand to retire convertibles.

The fading backlog

As with other leveraged capital markets sources who have lately conversed with Prospect News, the portfolio manager who focuses on both loans and bonds now sees the LBO-related backlog of bank loans south of $100 billion and falling.

"If you think Clear Channel doesn't get done - and most people think it won't get done - and if you think Bell Canada doesn't get done - and a lot of people think it won't - that would wipe off another $25 billion to $30 billion right away," the money manager said.

"That is a significant reason why people are looking ahead.

"I think [backlog-related] bank loans will become scarce pretty soon."

Quick turnaround

The investor remarked that the apparent turnaround in the loan market seems to have taken place with a rather astonishing quickness.

"Right now I don't think there are any natural sellers in this market. And there is plenty of buying interest which you are seeing reflected in prices.

"It's the opposite of what happened on the way down, where there were not a lot of natural buyers, and you sold if you had to.

"And it dropped really quickly."

Technical cleanup underway

The portfolio manager said that the cleanup of the technical mess in the leveraged markets seems unmistakably to be underway.

However, the source added, "I think we're going to be trading on fundamentals pretty soon.

"And the fundamentals are way worse than they were six months ago."

This investor's perception is that the U.S. economy is presently in a recession.

"People who are saying 'No recession' are really adding up numbers in a very specific way which gets them just positive," the source asserted, adding that the "no recession" scenario hinges on present strength among exporters, due largely to the relative weakness of the dollar.

"They're slightly offsetting the negatives of the consumers, etc.," the investor added.

"So it's a recession for everybody except exporters."

However, the portfolio manager added, there is at least one novel aspect to the present downturn: high yield defaults have been notably slow at lifting off their historic lows.

The investor cited a report published last week by Moody's Investors Service which noted that several factors unique to the current corporate credit environment suggest that default rates may not increase as rapidly in 2008 as had previously been predicted by Moody's model.

While the model is currently forecasting a 5% global speculative-grade default rate by year-end 2008, Moody's said it now believes that the default rate will more likely end 2008 in the 3% to 4% range, still up sharply from its current level of 1.5%.

"That sounds right to me," the investor commented.

"It's hard to look, name by name, and get the default rate to 5% in 2008.

"Maybe defaults will be 3% to 4% this year, and 3% to 4% next year.

"That would be a weird recession."

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