Nail biting and cold sweats subsided last week as the secondary loan market bounced back to levels closer to comfort for market players. Over the past two weeks the market has been buzzing with word that hedge funds were bailing out of loan positions, prompting others to sell. Levels dropped and several above-par names fell to the 98-99 range. But on Wednesday of last week most of those names moved back up as traditional loan players came back into the market. "We saw a big pop back up," one trading boss said. "A lot of buyers came in."
Masonite International Corp., Metro-Goldwyn-Meyer, General Growth Properties and Fidelity National Financial all benefited from the increased buying, market players said. GGP traded up from 99 3/4-100 to 100 1/4-100 1/2 as Masonite inched from 98 3/4-99 to 99 1/2-99 7/8. MGM went from 98 1/2-99 to 99-100 and Fidelity moved from 98-98 1/2 to 98 1/2-99.
There is some debate over how active hedge funds have been as sellers. Some traders said hedge funds have rotated completely out of loans in favor of better yields in the high-yield bond market. But at least one official on a big desk disagreed. "People want to believe that hedge funds are bailing out of the market," he said. "I haven't seen a net cash exodus from the market. I have seen a net cash increase in the market, so I would disagree with that line of thinking. A lot of people think it has [happened]. But it hasn't."
There is agreement on who was buying last week. Prime rate funds and collateralized loan/debt obligation managers were active across the board, traders said. Some had been selling in the days before, following the lead of some hedge funds and hoping they could get the paper back later at a cheaper price, the trading official said. "When the market popped [Wednesday], you suddenly saw a lot of people trying to buy back because they didn't want to miss the buying opportunity," he said.
One area where hedge funds almost certainly have vacated is the second lien market. "There's been a huge price adjustment on second-liens," the official said, adding that hedge funds have backed off from that paper. He said the question is if the retreat is a fundamental change in hedge funds' strategies or just a price adjustment. The answer is not yet available, but the suspicion is that hedge funds are done with the current crop of second liens. "Will the hedge funds continue to do the type of second liens that they were doing before or they have tightened up?" the official asked. "They've probably tightened up."