Lpc leveraged loan market left reeling by brexit

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The European leveraged loan market has entered a period of uncertainty after Britain voted to leave the EU. On Friday loan investors and bankers digested the news of Brexit and tried to work out the knock-on effects on a market that was already suffering from low deal supply and high demand."Just extraordinary. There will be a period where people need to process it but they will adapt very quickly and start working through the consequences," a loan banker said."The bulk of the leveraged loan market is based in euros and is senior secured so it should be okay. Undoubtedly there will be equity volatility and valuations might alter, but it's unlikely to affect the bulk of the credit in the market, which should remain relatively stable."He said volatility will likely push yields down on higher-rated credits and lead yield-hungry investors to invest further down the credit spectrum."M&A could be impacted by uncertainty and valuations could be affected. Deal flow will be a concern I think. But the loan market as a whole should stay a haven of yield and stability and will stay open."In the secondary market, the spread between bids and offers widened, as traders showed a willingness to buy into market weakness, but investors were reluctant to sell, one loan investor said."There's stuff being marked down but no real volume to it," he said. UK biscuit company United Biscuits was bid at 98.75% and offered at 99.75% on Friday, according to Thomson Reuters LPC data. It was previously bid at 99.75% and offered at 100.5%.

Meanwhile, Swiss chemical company Ineos was also bid down at 95% versus 97% on Thursday, while it was offered at 98.5% versus 99% on Friday. UK gambling company Gala was down 2% to a bid of 98% from a bid at par, while it was offered at par versus 100.5. A second investor said he expected priced CLOs may step in with bids if prices drop a further three or four points."There's no volume right now if things do fall then people might step in but at the moment there are no buyers and sellers," he said. Bankers said the market had still not found its pricing level, but it was likely to widen in the aftermath of the vote amid wider volatility.

This will scupper opportunistic deals that had been poised to come to market if the referendum outcome had calmed financial markets and maintained high loan pricing in the secondary market. SLIM PICKINGS The pipeline for new buyout financings was already slim ahead of the referendum, with French real estate services firm Foncia's 1bn debt package and Bilfinger's building and facility services unit's 1.25bn all-senior secured financing preparing to launch in July."I don't think deals will rush to market but by the following week there may be some clarity on whether pricing hurdles have changed," a second loan banker said.

"Verisure and Verallia pricing at 450bp [earlier this month] will probably look like fantastic trades by the end of the year."However, he said the fundamentals of a demand-supply imbalance in the European leveraged loan market remain unchanged. Any impact will be tempered by the lack of deals in the market, a third banker said."What it does do potentially, it may reel in a few structures. If it doesn't push pricing up it will certainly put a floor on pricing," he said."Does it mean significantly lower volume? We already have low volume. People still need a return, we will be in a lower interest rate environment for longer, and leveraged loans provide that return."But he warned in the longer term there will be more pockets of volatility affecting financial markets including the loan market as Britain negotiates its exit from the European Union and the eurozone deals with the consequences."It's more of medium term and longer term question - what does the market look like as the smoke clears?"The European market will also be keeping a close eye on turmoil elsewhere including in the US, which is a larger more liquid market.