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Lpc leveraged loan market left reeling by brexit


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.

Money markets 7yr notes are still hard to get in repo market


* Specials in 5yr and 7yr notes could last to Feb 29 * More demand for 7yr notes in hedges, futures trades * Repo traders still divided on cause of 7yr special By Emily Flitter NEW YORK, Feb 22 The heavy premium on five- and seven-year Treasury notes as overnight repo collateral could last for the rest of the month, until new five- and seven-year notes enter the marketplace in auction settlements on Feb. 29. Repo market participants were still scrambling on Wednesday to find seven-year notes and those who did paid a dear price. The rate on seven-year repo collateral was around -200 basis points, according to Jefferies, just 100 basis points above the penalty cost of a failure to deliver a Treasury security in the repo market. Repo market participants trade cash for securities, including Treasuries, in short-term loans. Some repo participants need the cash; others need the securities more than the cash and end up paying a premium to obtain them. The securities to which a cost is attached are said to "trade special." "I think it kind of feeds on itself," said Tom Simons, money-market economist at Jefferies & Co. in New York, referring to the specials in five year notes and seven year notes. "Since the rates are where they are it makes sense for people who are holding them to keep holding them until the people who need them get even more desperate." The Treasury Department's auctions of five-year notes and seven-year notes this week are set to settle at the end of the month. Strong demand at Wednesday's $35 billion sale of five-year notes could be seen again at Thursday's $29 billion seven-year note auction, based on the similar repo collateral conditions for the two Treasury maturities. A definitive reason for the specials remained elusive on Wednesday. "That part of the curve has gotten really rich so you could have a bigger short base and there's less available to buy," said Ira Jersey, interest-rate strategist at Credit Suisse in New York. Seven-year notes are in more demand now for use in hedges against mortgage duration risk, as well as in Treasury futures contracts, Jersey added. Meanwhile, a flood of European Central Bank cash may not be sufficient to unblock market funding channels for most euro zone banks struggling to reduce exposure to risky assets while a flare up in the sovereign debt crisis remains a threat. The ECB's first offering of almost half a trillion euros in cheap, three-year funds at the end of last year and the prospect of a similar take-up at a second tender on Feb. 29 have been hailed as removing the risk of a major credit crunch and a chain of bank failures across the euro zone. But the extra ECB cash has so far not persuaded lenders to introduce new credit lines or significantly extend the length of their existing funding agreements. Weak banks remain frozen out of money markets while the strong fear exposure to risky peers. A marked pick-up in banks' ability to borrow money in the market - whether from other banks or money market funds - would encourage them to fund businesses and households, helping heavily indebted economies such as Italy and Spain grow. Access to market cash is mostly restricted to a select group of highly-rated banks in the heart of Europe, such as Germany's Deutsche, Rabobank of the Netherlands and national champions in southern states, such as Spain's Banco Santander, traders say. Weaker banks, often exposed to riskier euro zone debt or other toxic assets such as bad mortgage loans, depend on the ECB for funds. Analysts say this is unlikely to change as the threat remains that Greece may not be the last euro zone state to restructure its debts.