Debt market continues to improve

The end of short-selling by hedge funds could be nigh, as market participants’ focus shifts from opportunistic buys to companies’ economic fundamentals.

The average bids for actively traded European leveraged loans have risen to nearly 90 percent of face value in the week ending April 24, the fifth consecutive rise week on week, according to Standard & Poor’s LCD, the loan commentary arm of the rating agency.

The European average is the highest since the week ending February 7, and the improved prices have been taken as a sign of a recovery in the debt markets by participants. 

The rise echoes higher trading in the US market where the average bid for US loans rose to a three-month high of 92.1 percent.

The fillip in the markets has been seen as a chance for investors to assess the quality of credits, instead of looking for opportunistic buys, as problems caused by the forced selling of mark to market hedge funds appear to be easing in the market.

Mark Conway, head of credit at CQS, the hedge fund, said: “The technicals that have dominated the market over the last few months are subsiding. There’s been a shift of balance away from technicals towards the fundamentals.”

Certain deals like energy specialist First Reserve’s £906 million (€1.15 billion; $1.78 billion) take-private of Abbot, the oil and gas company, have been syndicated into the debt markets oversubscribed and other loans are beginning to trade higher.

The sale of $12.5 billion (€8 billion) of leveraged loans by Citi to a consortium of private equity firms has also been taken as a sign confidence in the market is improving.

Andrew Golding, who is running 3i’s debt programme, said: “We started in October and we’ve bought roughly the same amount month on month. We’ve been divesting more in April looking to upgrade the quality of our portfolio.” 

This also means opportunistic investment programmes being run by private equity firms are having to scour harder to find credits which will achieve equity-like returns.

Golding said:  “There are obviously big names that are now trading close to par. We feel these spreads will probably come down again as the secondary market for these credits looks increasingly expensive. But in the secondary market beyond the flow names there is value still to be had.” He said there were also good opportunities in the primary market.