Investors and bankers have warned that financial markets will be volatile in the near future, including the loan market, as countries within the Eurozone digests the consequences of Brexit.
With British voters choosing to leave the European Union, loan markets in Europe have entered a period of uncertainty.
As investors and bankers digest the news and impact of Brexit, financial markets are being hit by the shockwaves of the outcome.
“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,” said a loan banker. ”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 went on to add that it’s likely that further volatility will push down yields on higher rated credits and lead yield-hungry investors to invest further across 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,” said the loan banker.
As per a loan investor, the spread between offers and bids have widened in the secondary market as traders are more willing to buy in a down market, however investors are reluctant to sell.
“There’s stuff being marked down but no real volume to it,” said the loan investor.
According to Thomson Reuters LPC data, bids for Britain’s United Biscuit were at 98.75% and offered at 99.75%. Previously its bids were at 99.75% and offered at 100.5%.
Britain’s Gala, a gambling company was down by 2% and saw bids at par at 98% while previously they were at 100.5.
According to another investor, CLOs may step with bids if the markets were to fall by 3 or 4 points more.
“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 in Britain have stated that financial markets have yet to find their pricing levels and are likely to be wild and volatile.
Although the market for new financial buyouts were slim before this shock verdict, French realestate firm Foncia had planned to come out with a 1 billion euro debt package later in July while Bilfinger’s building and facility services unit had planned a 1.25bn euro debt package, which again was to be launched in July. These will have to be re-scheduled.
“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,” said a banker. In comparison, “Verisure and Verallia [which were priced] at 450bp [earlier this month] will probably look like fantastic trades by the end of the year.”
He went on to add that the fundamentals of a demand-supply imbalance in the European leveraged loan market has remained unchanged, despite Brexit.
”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. 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.”
However, he warned that in the long term, financial markets within EU are likely to be affected by pockets of volatility, including the loan market, as Britain makes its way out of the Union and the Eurozone slowly digests the consequences of the referendum.
“It’s more of medium term and longer term question – what does the market look like as the smoke clears?”
Categories: Economy & Finance, Strategy
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