Off The Wire
Euros trade better than dollars as US market tumbles
NEW YORK, Dec 5 (LPC) - Euro-denominated loans are trading better on recent cross-border deals from issuers such as Refinitiv, the former Financial & Risk unit of Thomson Reuters, and Akzo Nobel’s chemical unit, in the midst of turbulent market conditions in the US.
Bankers and investors attribute the difference to greater demand in Europe compared to the US.
“I think it’s technically driven,” said a head of leveraged finance in the US. “There’s just a much smaller market in Europe and a lot more money there chasing deals comparatively speaking.”
The banker said the loan market in Europe tends to be dominated by CLOs as investors, whereas in the US demand is dominated by retail loan funds.
Since CLOs are not as nimble as loan fund investors and tend to hang on to loans for longer periods of time, this has translated into a more stable market in Europe. The US loan market saw a US$1.32bn outflow in the week ended November 28 from retail funds after posting a US$1.74bn outflow the previous week, which was the biggest since December 2015.
However, CLO formation in the US has helped keep levels from falling even more with volume soon expected to top the all-time high of US$123.6bn set in 2014.
In Europe, CLO volume hit €26bn (US$29.6bn) in mid-November, topping the post-crisis record of €19.2bn set last year. The all-time record in Europe is €32.9bn, set in 2006.
It is not unusual for loans in Europe to trade above their counterparts in the US. In fact, LPC’s Top 40 Leveraged EMEA loan index has traded above the SMi100 North American loan index of heavily traded loans since February 2014.
However, the EMEA index dropped below the North American index in July for the first time in more than four years.
“If something trades down to 97 in Europe, there’s a credit reason,” the banker said. “In the United States that can happen just because of the market.”
Loan investors in Europe were spooked at the time over macroeconomic concerns, including negotiations between the UK and the European Union over Brexit. However, that inversion remained short-lived, and the EMEA index popped up above the SMi100 again around the beginning of August where it remains.
The two largest buyout transactions with cross-border deals have seen a steady spread between the euros and the dollars. Of note, the euros have been pricing with a spread of 25bp-50bp above the dollars.
Akzo Nobel’s chemicals unit, through an issuer known as Starfruit, lined up a US$4.34bn term loan at 325bp over Libor and a €1.79bn euro-denominated term loan at 375bp over Euribor.
Refinitiv priced a US$6.5bn term loan at 375bp over Libor and a €2.75bn term loan at 400bp over Euribor on September 18.
The average bid for Akzo Nobel’s euros was at 99.75 on Tuesday, while the dollars were being bid at 98.65, according to LPC data. Refinitiv’s euros were bid at 99.65 versus the dollars, which were at 97.35 on Tuesday.
An investor said the lack of product in Europe right now has contributed to the difference in pricing as CLO formation remains strong.
“We are seeing more of an issuance delay in Europe,” the investor said.
He said that new CLOs are being lined up for the beginning of next year, which should keep demand overpowering supply and consequently boosting secondary levels until that equation balances out. (Reporting by Jonathan Schwarzberg Editing by Chris Mangham and Michelle Sierra)