Stressed names with bond counterparts have been increasingly volatile as the loan market chases the easing bond market. "Anything that's got a pari [passu] is getting smoked," said one dealer. Traders pointed to loans for Calpine Corp. and Qwest Corp. as examples. "They're basically bonds with a credit agreement," said one trader. Calpine's new second-lien term loan, which is a part of the company's $3.3 billion debt package, slumped into the 88-89 range from the 91-931/2 context. This loan is pari passu with the bonds. Meanwhile, Qwest's new $1.75 million term loan, which has a $500 million fixed-rate piece, dropped about five points two weeks ago this Friday. But market players said the loan recovered to the 94-95 range by the end of last week following a Treasury market rally and the announcement of the deal backing the second phase of the QwestDex transaction.
Market players said the cause for the volatility may be the increased participation of non-traditional bank loan players in these term loans. The loans linked more closely to the high-yield markets attracted more cross-over investors and hedge fund players, they explained. Qwest's deal was said to be syndicated out 90% to hedge funds. While traditional buyside accounts often sit back and watch, hedge funds trade, commented one buysider. This creates more activity, more clearly observed prices and volatility. "It's healthier for the market to find out where the paper should trade," he said. Loans with traditional institutional loan players were said to be relatively stable.
Calpine, in particular, was under pressure this week as the company prepped a $750 million bank deal to refinance its CCFC1 facility. Traders said the new deal was putting pressure on the market for the loan, which was already weighed down due to the massive size of the company's debt package issued last month. Dealers and buysiders suggested that the upsized deal provoked the change in appetite for high-yield debt, which was compounded by a shift in the Treasury markets and the increased flows out of the high-yield mutual funds. "That is an anomaly. I have never seen anything like it," one investor said in regards to how Calpine's paper traded down so drastically.
These factors added to the selling pressure in the market. On the one hand traders said some bank debt players were selling paper to make up for losses they took due to the depressed prices of recently syndicated loans. But others said the accounts simply wanted to take their profits. "We had a tremendous run in the last 12 months [and] in order to realize gains you have to sell some stuff," one buysider said. Rick Barraza, senior v.p. of investor relations for Calpine, declined comment. Oren Shaffer, Qwest's vice chairman and cfo, did not return calls by press time.