Secondary loan prices of US agribusinesses fall amid China tariff war

High Liner Foods

21/06/2018 17:26

By Yun Li
    NEW YORK, June 21 (LPC) - The secondary loan prices of US
food producers and processors are falling as retaliatory tariffs
by China on US agricultural products raise fears of a trade war
that will hit economic growth and jobs. 
    Average bids for food and beverage loans in the US secondary
loan market have tumbled 200bp since March to 98% of face value,
according to Thomson Reuters LPC data, when President Trump
unveiled his tariff plan. The drop is the biggest decline among
all US sectors, the data shows. 
    Secondary loan pricing is also weakening overall as trade
tensions rattle through the markets. The SMi100, an index that
tracks the 100 most widely held US loans, fell to 98.4 on
Wednesday from 98.62 on March 1 and is now 54bp lower than 98.94
on February 7, the highest point in 2018 to date, according to
Thomson Reuters LPC data.
    “[The trade conflict] is reverberating through the market,”
a trader said. “It’s why equities are down and loans are
following suit.”
    Trump’s imposition of tariffs on US$50bn of Chinese imports
on June 15 sent shockwaves through the financial markets and
caused a sell-off in global risk assets. Beijing retaliated with
a 25% tariff on 659 US products including soybeans, pork and
seafood, starting July 6. The shares of agricultural commodities
also fell sharply, with soybeans dropping to their lowest level
since December 2007, Reuters reported.
    Last week China included pork, fruit and nuts in the tariffs
to be imposed on July 6, after previously including them on
April 2, Reuters reported. This means that US pork now faces
cumulative Chinese import duties of 71%, excluding value added
tax, and fruit faces a 50% levy. 
    The food and beverage sector is seeing sharp losses because
the tariff risk added to the existing operating factors such as
higher freight and labor cost that are weighing on US
agribusiness, said Chris Johnson, a director at S&P. 
    “It doesn’t surprise me that the loan market is pricing in
more risk,” Johnson said. “Export markets often act as a support
mechanism for pricing [of agricultural products].” 
    Some protein processors could also face margin pressure as a
drop in beef and pork exports would lead to excess domestic
supply and weaker domestic wholesale prices, Johnson added. 
    CTI Foods, a company that provides custom products to the
food service industry, including raw and pre-cooked protein, and
dehydrated beans, has seen its US$345m term loan B drop about
four points since March to 86.75-89 on Wednesday. The company’s
ratings could be pressured from any unforeseen margin pressure
from tariffs, S&P said in a report. 
    Seafood company High Liner Foods’ US$300m term loan fell to
96.5-98 on Wednesday from 101 before March. B&G Foods’ US$650m
term loan B has fallen to around par from a 101 trading range in
February.
    The trade spat is escalating as the two countries make
tit-for-tat tariff threats. China’s next set of tariffs is
expected to target US energy and healthcare products, Reuters
reported. 
    The growing prospect of a prolonged trade war is likely to
generate more volatility and sector weakness in the US leveraged
loan market, as the food manufacturing equipment sector and the
broader manufacturing sector are also expected to be affected.
    “The impact on leveraged loan and high yield issuers could
obviously be more acute given the leveraged nature of their
businesses,” said Jon Poglitsch, head of credit research at
Highland Capital Management. “Outside of the obvious effects in
certain areas of commodities, it appears that companies involved
in the industrial, medical equipment, and auto supply chain
sectors are among those most likely to be impacted.”

 (Reporting by Yun Li. Additional reporting by Kristen Haunss
Editing by Tessa Walsh and Michelle Sierra)
 ((yun.li@thomsonreuters.com; 646-223-6278; Reuters Messaging;
yun.li@thomsonreuters.com@reuters.net; Twitter @TRLPC
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