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Kat Hidalgo

With a relative lack of primary - including one pre-announced last Friday - there was plenty of time to consider the two pure HY deals in market this week. In fact, it’s been almost two months since we had such slight issuance - perhaps we are really winding down for the August break.

First up, PeopleCert, the professional exam assessment and certification body, announced financing for its £388m acquisition of Axelos, the former UK Gov-Capita JV. The combination marks a move toward vertical integration, as PeopleCert had administered Axelos’ two flagship products, ITIL and PRINCE2 certifications (88% exam revenue) since 2010. As part of the deal, FTV capital contributed £140m in new cash equity and will now own around 21% of the combined group, implying a 16.0x EV/EBITDA multiple.

ESG concerns circle mainly around the privacy and security of sensitive data, alongside IP.  There remain significant opportunities on social factors, which are lagging versus PeopleCert’s main competitor, Pearson. However, with a relatively conservative covenant package , price talk on the €300m Senior Secured Notes due 2026 (B2/B/B+) was sent out in the 6.00% area, before managing to trim 25 bps to 5.75% on final pricing.

It was a different story for Barclay-owned Shop Direct (Very Group), who were out marketing £575m in Senior Secured Notes due 2026 (B3/B-)  to refinance existing debt. The deal attracted interest for several reasons, not least a prospective £25m dividend, hidden away on p196 of the Offering Memorandum. Firstly, we mused on a refinancing back in January, with a breakeven of just one-and-a-half years if new notes priced at 6.50%, and also on the possibility of an owner exit.

Several exits have been suggested for the group in recent years. A 2017 sale was pulled on valuation concerns, and rumours re-emerged in late 2019, further fuelled by the passing of Sir David Barclay and speculation around a divestment of some of the brothers interests. Earlier this month, the Times reported STJ Advisors had been hired to prepare the company for a possible floatation.

Secondly, as 9fin’s Caitlin Carey reports, the group drew attention for the unusual 102% equity claw included in its offering:

This non-standard claw can be used to redeem all or a part of the Notes within the first year after the issue date. The equity claw reverts to the standard 40% par-plus-coupon formulation after the first year until the end of the non-call period.

This 102% claw appears designed to be used in connection with an IPO of The Very Group, which is reported to be in the works for next year.

The Times’ article says that a sale of a stake in The Very Group to a third party will also be considered. The 102% claw could also in theory be used in connection with a private M&A transaction. The definition of the term “Equity Offering” is very broad and includes almost any sale of capital stock or other securities, as long as the proceeds are contributed to the equity (or as quasi-equity) to the Company. I.e., if the group receives cash equity proceeds as part of an M&A transaction, then it can use these to redeem Notes using the equity claw.

The Notes also have portability, which is set at 2.75x net leverage for the first 24-months and 2.5x thereafter, so an M&A buyer could leave the Notes in place without triggering a CoC if the leverage test is met.

In light of The Very Group’s non-standard equity claw, there has been speculation on whether this feature could become “the new portability”, with future issuers incorporating this type of provision for additional flexibility even if they are not specifically contemplating an IPO/sale.

We would be very surprised if this provision became the new standard. Looking back at our database, we have seen a few non-standard equity claws. The most similar was in Adler Pelzer’s bonds issued in 2017, which had a 102% equity claw for the first 1.5 years, which could be used to redeem all or up to 40% of the bonds, with a standard 40% par-plus-coupon equity claw after the first 1.5 years until the end of the non-call period.

Below is a chart showing European HY bonds issued in the past five years that had non-standard equity claw provisions.

The Notes priced on Wednesday, and despite locking in a 125 bps saving on its existing Notes, landed at the wide end of PT for 6.50% (par). Perhaps a sign of the times, last week’s Ithaca Energy SUNs - another B3 offering - also came at the wide end of PT of 8.75-9.00%.

Elsewhere - and not strictly pure high yield - we also saw a deal from crossover name Valeo, the French automotive supplier. Issuing inaugural €700m sustainability-linked notes under its new Green EMTN, the seven year notes will pay 1.00%. Committed to carbon neutrality by 2050, the group hopes to decrease emissions 45% across its entire value chain by 2030 (2019 base).

While we’re by no means in an ice age, loan primary also appears to be slowly but surely cooling off. The value of loans currently in syndication dropped to €6.1bn-equivalent, down from €7.6bn-equivalent last week, and another step down from the prior week’s €14bn.

“Overworked” was the word of the week, as buysiders wind down for August, with one buysider saying their team looked at more than 15 deals last week and a second saying they alone looked at four deals in the same period.

Pricing has become slightly more attractive as investors have become more used to a steady onslaught of deals. Said the first buysider: “The CLO market has had a widening of liabilities, so we need to be quite disciplined about where we end up on pricing now. You need to be at E+375-400. We’ve also seen a return of the OID, where back in Q1, deals were getting done at par. That’s kind of off the table now as deals get done at 99-99.5.”

Pure healthcare saw a slight lull this week, with the sector being held up by agencies serving the space. Nevertheless, buysiders stuffed on pharma and hospitals are made sick, even at the association. “There’s been lots of issuance in the sector so we’re not looking for more healthcare issuers for a while,” said a third buysider, noting they were unlikely to look at either of the credits below.

One of the largest deals on the market, at $2.41bn, supports the combination of UDG and Huntsworth to create a healthcare communications firm. CD&R is the sponsor behind the deal, which includes a $400m 5-year RCF and a £330m 8-year pre-placed second lien loan.

Buysiders went glassy-eyed over PAI-backed SGD Pharma, despite healthy price talk of E+425, down from E+425-450 bps. The glass vials it manufactures are high margin items and the company has strong pricing power, passing on raw materials and energy costs to customers in the past; Nevertheless, the first buysider said: “We didn’t love it as it’s effectively a high capex, low growth business and it’s not going to de-lever massively. We also had a few questions on ownership and why they bought the business. It would need to come at a reasonable premium so at E+425-450, we’re likely to do a bit of it.”

On the trashier side of the waste management sector, Urbaser suffered in the eyes of buysiders. The business is being sold by China Tianying to Platinum Equity and generates around €400m in EBITDA. Some market participants have suggested the sponsor is not putting in enough equity and the ratings agencies are being too kind to the credit, especially for a high capex business with negative free cash flow.

The deal has now been pulled, with the issuer and leads citing market conditions.

Escaping landfill by a long shot, the TLB backing Macquarie's acquisition of Irish waste and recycling firm Beauparc was upsized from €525m to €555m with the incremental €30m being used to put cash on the balance sheet. Pricing squeezed to the tight end of guidance to E+375 bps from E+375-400 bps. OID remained unchanged at 99.5.

The company’s track record of acquisition-led growth, now under the wing of a sponsor experienced in a stable, essential sector, as well as high barriers to entry keeping its throne secure, has kept investors from putting this deal out on the curb.

The seven-year loan is guided high for a B1 at E+375-400 bps and 99.5 OID with a 0% floor, something buysiders noted with glee: “A B1 for 375?” said a fourth buysider. “Yes please.”

Macquarie agreed to buy the business for €1.431bn and has written a €840m equity cheque (c.60% of capital structure). Clients can log in to see our loan preview here. 

UK-headquartered drinking water purification and dispensing systems company Waterlogic flooded the market with a $800m-equivalent loan to refinance and fund add-on acquisitions. The Castik-owned business has been acquiring aggressively in recent years, and offers impressive recurring revenue of 67% according to Moody’s.

The dollar tranche is guided at L+425 bps with a 0.5% floor and a 99.5 OID. It amortises at 1% a year. The euro tranche, which has a bullet repayment, is guided at E+375-400 bps with a 0% floor and a 99.5 OID.

“We’ve picked up a lot of their loans previously with discounts when three were add-ons and such. E+375 bps is the bare minimum it could go for and I wouldn’t be overly surprised if it went for E+400,” said the first buysider.

It was a big week for digital and customer service agencies as three such companies priced loans, though with mixed success.

Sitel priced a dual-currency $2.6bn-equivalent term loan B that will back the company's takeover of domestic rival Sykes for $2.2bn.

Pricing on both tranches finalised at E/L+375 bps from guidance of E/L+350-375 bps, with a 99.5 OID from 99 at launch. The dollar loan comes with a 0.5% floor and amortises at 1% per annum. The euro loan carries a 0% floor.

Notable terms include incremental debt capacity up to the greater of $600 million and 100% of Consolidated EBITDA, plus unlimited amounts subject to 4.5x First Lien Net Leverage Ratio (if pari passu secured). Amounts up to the greater of $300 million and 50% of Consolidated EBITDA may be incurred with an earlier maturity date than the initial term loan, according to Moody’s.

One of the new money credits on the block, Martin Sorrell’s listed digital advertising and marketing firm S4 Capital, set final terms this week. The second buysider was put off entirely on governance concerns when it came to Martin Sorrell, his past alleged indiscretions and the key man risk associated with him.

The third buysider said they could have got past this concern, as the company seemed exciting in the long-term, but was held back by customer concentration and the dynamism of the sector.

“It’s when you throw in the technology risk. What happens if there’s a new way of digital advertising in 1-2 years and the industry completely changes?” said the third buysider.

Despite this, S4’s €375m TLB priced at E+375 bps with a 0% floor and a 99.75 OID, having launched at E+400 bps with a 99.5 OID. Clients can log in to see our loan preview here. 

Think-cell, a niche, single-product company that develops charting and layout software for Powerpoint, is sliding to the finish line this week. “It definitely has some attractions. It’s a product that’s well-liked by its clients and they could potentially increase prices or grow their customer base. There’s probably some incremental investment in the cost base, which is common for founder-owned businesses,” a fifth buysider said. The credit offers a healthy margin of E+450 bps.

Webhelp’s loans to support the acquisition of Guatemalan competitor OneLink priced at the wider end of guidance. The company has a degree of customer concentration, with its top 10 customers generating 26% of revenue, while execution risk is rife with its latest acquisition, as it is its first foray into Latin America.

French elderly care services company Colisee priced a €140m add-on term loan B to fund its acquisition of French nursing home operator SGMR Les Opalines. The covenant-lite loan is fungible, and priced in line with Colisee's €1.025bn TLB, which was repriced and increased in June 2021 and pays E+375 bps. The OID finalised at 99.5 from 99.25-99.5 at launch.

AVS Group launched a fungible €120m add-on term loan. Offered with a margin of E+375 bps and 0% floor, the same as the existing €565m debt, price talk is set at 99-99.5 OID. Commitments are due by August 3.

Though as yet unrated and with little information on price talk or commitment dates, Masmovil promises to be one of the larger deals of August, as it buys competitor Euskaltel.

It was another flat week in Secondary, gaining an average of just 0.04 pts (58% +0.23 pts | 38% -0.25 pts). Industrials performed best on the week, up +0.15 pts, with Healthcare in second (+0.07 pts). Energy meanwhile saw the greatest losses, down -0.15 pts. Meanwhile, the iTraxx European crossover held steady at around 235 bps. In European domiciled HY credit fund flows, Global HY (-$45m), Euro HY (-$147m) and US focused funds (-$140m) all saw outflows.

According to BoA Global Research, overall HY leverage fell to 4.0x at H1 2021 (from 4.4x in the first quarter), with single B leverage seeing the greatest drop, to 4.3x from 5.1x. Spread per turn of leverage has rebounded slightly (driven by single B’s) in H1 2021, from an all time low of 50 bps at the end of 2020.

Earnings are once again in full flow, perhaps part explaining the relatively light action in Primary this week. Unsurprisingly, most firms show positive traction against last year’s lockdown period - you can see headline earnings in real time as they report on our Earnings Tracker.

In single name winners, this week’s top poll - Aston Martin - revealed boosted sales on the successful run-out of its new SUV, the DBX. The SSNs are currently trading at ~111 pts, with the 2nd Lien PIKs at around 115 pts, the latter up +2.5 pts on the week.

The secondary market was as flat as the Netherlands this week, moving less than a tenth of a point, though according to some buysiders, we may see things progress in line with the Peak District as primary calms down for August.

The second buysider said: “I think everyone’s just focused on primary right now because there’s so much of it. But it’s like a seesaw and when there’s no primary, people will look to secondary for value.”

No major sectoral fluctuations occurred and no credit fell more than a point either.

The biggest riser was Cineworld, who secured $200 million in additional loans from existing lenders this week, according to Reuters. The company, which had net debt of $8.3bn at the end of 2020, also renegotiated existing debt agreements to reduce minimum liquidity requirements and relax limitations on the use of cash as more cinemas reopen, said the report.

This is following last week’s performance from the company, when it’s €607.7m E+263 bps 2025 TLB fell -5.6 pts. Fitch placed the cinema chain on negative watch in May 2021, citing a $255m claim from shareholders unhappy following Cineworld’s acquisition of Regal Entertainment Group that Fitch writes could lead to a Q3 liquidity crisis. The agency also notes uncertainties around the company’s liquidity, with Cineworld burning around $60m of cash per month during cinema closures, plus a dim picture on future attendance.

The company’s $3.325bn TLB paying L+250bps was indicated at 76.2, while its €607.7m TLB paying E+263 bps was indicated at 81.8 at the time of publication.

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