Feb 15 US investors are assessing the volatile secondary loan prices of companies that are being hit by technological disruption as textbook publishers join specialty retailers and oil and gas companies on a growing list of sectors facing long-term ‘secular’ change.
The secondary prices of textbook retailers, such as Cengage Learning, fell to 92-95% of par or face value in early 2017 as the sector faces increased competition from ebooks, rental and used secondary markets.
This dip follows steeper falls in specialty retailers such as department chain Neiman Marcus and womenswear retailer Ascena Retail, which are battling internet shopping models. Neiman Marcus is trading below 80% of face value and investors are evaluating positions and sector exposure.
“We are looking at all our retail names to see the impact from online competition,” said an investor at a Collateralized Loan Obligation (CLO) fund.
Secondary pricing volatility shows no sign of abating for companies under pressure from technology. Some oil and gas companies are still trading at stressed and distressed levels after the sector was hit by increased supply from new fracking technology and low oil prices two years ago.
Efforts to value technologically challenged companies are playing out in the secondary market as companies with covenant-lite loans are generally unable to increase pricing on existing primary loans or refinance.
“When companies undergo secular change, the loans become more volatile. But there is more opportunity,” a loan portfolio manager said.
Would-be buyers and sellers are haggling over secondary market valuations as investors switch into intense active management and consider whether to ride out the volatility or to reduce positions while hedge funds and more aggressive bank loan and high-yield asset managers circle.
“We have been investing selectively in some stressed and distressed areas,” said Trey Parker, portfolio manager and head of credit at Highland Capital Management.
CHILLY WINDS
Textbook publishers are feeling the chill after industry leader Pearson lowered 2017 profit guidance on January 18. McGraw-Hill Education’s term loan fell from par bid to 94.5-95.5 on January 18 but recovered a point to 96-96.75 by February 14 after the company’s guidance on February 8.
Publishing company Houghton Mifflin Harcourt’s term loan was 93.25-94 on February 14 and Cengage’s term loan hit 91-92.25 on February 7 before recovering to 93.25-94.25 on February 14.
Retail remains the most depressed sector in credit, according to S&P with 18.6% of distressed companies, totaling 19 firms on January 17, up from 14 on November 15, as consumers continue to swap to online operators that allow buyers to easily compare prices, and millennials shun malls and choose to spend on experiences.
Poor sales results from several bellwether retailers in January prompted investors to start cutting their exposure to retailers with large brick-and-mortar footprints, and fashion retailers with exposure to discretionary spending.
Neiman Marcus’ term loan has fallen 8 points since the start of the year to 79-80 on February 14 and women’s apparel specialist Ascena Retail’s term loan dipped nearly 7 points to 90.5-91.5 at the same time. Sporting goods seller Academy Sports & Outdoors’ term loan has lost 10 points this year to 82-84.
Oil and gas companies have had longer to adapt to their new reality and pressure is easing. The sector has a distress ratio of 12.2%, according to S&P, and 22 impaired companies.
Oil prices are much improved from US$30 a barrel a year ago but Goldman Sachs is projecting benchmark U.S. crude to stay in the US$50 range for the next two years, far removed from over US$100 per barrel in June 2014.
Offshore drilling company Seadrill’s term loan was trading at distressed levels of 74.75-75.5 on February 14 but is up sharply from around 35 in December 2015. Exploration and production (E&P) company Fieldwood Energy’s second-lien term loan also traded at 75.5-77.5 on February 14.
While technological change is expected to ripple through most sectors, few are expected to be hit as hard as the yellow pages sector, which saw its business model wiped out by the internet, starting in 2007. Newspaper publishers were also hit hard by the decline in advertising revenues.
Newspaper publisher Tribune, which piled on nearly US$7.4bn in term debt during its leveraged buyout in 2007, filed for bankruptcy in 2008 but remains in the loan space via its legacy companies, broadcaster Tribune Media and newspaper publisher Tronc.
Tribune Media refinanced US$1.76bn of term loans in January and paid down US$400m of the roughly US$500m non-extended term loans in February. Tronc had US$385m of term loans as of September 2016, according to the company. Tribune’s term loan traded at 100.5-101.25 and Tronc’s term loan at 100-101 on February 14.
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