By Lisa Lee and Sharon Klyne
NEW YORK, July 29 (Reuters) - Slumping commodity prices are hitting the secondary loan prices of iron ore, oil services and coal companies as China's stock market volatility raises fears that demand in the world's most commodity-hungry economy is cooling and global markets brace for an imminent U.S. interest rate rise.
Secondary bids for Australian iron ore company Fortescue Metals Group gained one point on Wednesday to 82.5-82.5 percent of face value, rebounding from its one point fall on Monday after Shanghai's stock market saw its biggest drop in eight years. Fortescue's loan was trading at around 87 percent of face value on July 5.
The benchmark iron ore spot price hit a four-year low of $44.1 on July 8, before bouncing to $51.40 this week, a far cry from 2010 and 2011, when the price of ore hit $191.90. Some analysts are forecasting that iron ore prices could drop to $38 before year end as Chinese demand weakens and supply continues to grow.
The drop is putting pressure on smaller producers, such as Australia's Atlas Iron. The company's $275 million term loan dived to 34 percent of face value on July 24, 16 percent lower than its April level of 50 percent, according to Thomson Reuters Secondary Market Intelligence.
Loan traders attributed the falls to slowing global demand, primarily in China, and fears of a U.S. rate rise, which should lead to a stronger dollar and softer commodity prices.
"I'm not inclined to catch a falling knife," a loan investor said.
OIL FIRMS HIT
Oil prices are also falling amid fears of global oversupply. The U.S. benchmark fell 1.56 percent to settle at $47.39 a barrel on Monday and Brent crude dropped 2.11 percent to close at $53.47 a barrel on Monday, nearly half the level it was last summer.
Loans for oil production, exploration and services companies also traded lower as a result. Offshore drilling company Seadrill Ltd's term loan gained one point to 74.5-75.5 on Wednesday after falling 1.5 points to 73-74.5 percent of face value on Monday, and has lost nearly three points since June 29.
Deepwater oil and gas driller Ocean Rig Management Inc's term loan, which was issued at Drillships Ocean Ventures Inc (DOV), fell one point to 81.25-83 percent of face value on Monday then gained 50bp to 81.75-83.25 on Wednesday. DOV's term loan has dropped 3.25 points in the last month.
Oil exploration and production company Fieldwood Energy's first-lien term loan traded at 91.5-92.5, similar to where it slumped 1.5 points on Monday but still far from 95.5-96.5 a month ago. And Fieldwood's second-lien loan traded at 56.5-57.5 on Wednesday, compared to 76.25-77.5 a month earlier.
Exploration and production company Sabine Oil & Gas Corp's term loan was flat at 27.5-30.5 percent of face value on Wednesday after reaching that level following a bankruptcy filing on July 15 in a bid to repair its capital structure amid depressed oil and natural gas prices.
COAL COMPANIES SUCCUMB
The commodity rout is also putting pressure on stronger coal companies, which have weathered a difficult time for the sector in the last two years that forced smaller companies, such as Walter Energy Inc, into bankruptcy protection and more are expected to follow.
Peabody Energy Corp, the largest private-sector coal company in the world, saw its loan trade down to 74.75-75.5 percent of face value on Wednesday, adding to a nearly 10-point decline in the last month (June 29 to July 27). Murray Energy's term loan B-2 was flat at 83-84 on Wednesday, after easing 50bp on Monday that further exacerbated a 10-point drop since the end of June.
Even stalwart Westmoreland Coal Company's term loan was quoted at 91-92 percent of face value on Wednesday compared to its 97-98 market before the broad commodity weakness.
Coal miner Arch Coal Inc's term loan was at 55.5-56.5 percent of face value on Wednesday, lower than a 68.25-70 level before announcing a distressed debt exchange at the end of June. Coal producer Alpha Natural Resources LLC's term loan inched down 1.5 points to 67.5-68.5 on Wednesday, lower after negative credit news in the last month including a share de-listing, a possible Debtor In Possession (DIP) financing and drawing down on a $445 million revolving credit on July 7. (Editing By Tessa Walsh and Jon Methven)