Scary season came around quicker than expected for investors too as we saw markets sell off across asset classes this week — all stemming from the uncomfortable idea that rates will be staying higher for longer.

Highlighting the extent of the bond rout this week, we saw some post-GFC highs for both the US 10-year (4.73%) and 30-year Treasury yield (4.90%). 

At the time of writing, oil prices are on track for their worst weekly performance (down more than 11%) since the bank failures of March as fears intensify over weakening growth. Credit markets are also angsty — US HY spreads at their widest in more than three months.

In leveraged finance markets, we continued to see volatility (check out the latest Friday Workout for more on the fallout). Last week saw heavy BWIC supply, and there was more this week, but loans were not immune from market conditions. As noted in Excess Spread, Anchorage pulled a planned BWIC of the Anchorage Capital Europe 6 CLO portfolio, as market conditions turned. Find more coverage of the week’s BWIC flow, including some selling from Napier Park, in this piece.

In a way, it’s what global central banks want to see. Poorer sentiment should lead to lower inflation and a cooler labour market over the next few months (today’s US job report is particularly important as it is the last before the Fed’s decision on 1 November).

For investors, the relative value question between bonds and loans remains as important as ever.

A buysider said: “Given the duration component in bonds, you’ll choose that if you think we’re at the peak in rates [and then going lower from there], but into loans if not. For the more conservative investor, being secured and floating as you usually are in loans is a real benefit — not to mention the high recovery rate.”

We’ve seen a slightly quieter primary market in response to volatility but for the most part, it looks like banks are continuing to push through their pipeline.

High yield

The sell-off might have discouraged some EHY borrowers from going to the market with such high base rates.

Nevertheless, Italy's bottle top maker Guala Closures rushed to fund a substantial dividend to sponsor Investindustrial amid the chaotic market backdrop, and placed the 2029 €350m FRN in less than three days.

The deal was announced on Monday, with price talk of E+400bps-425bps at 99 released on Tuesday. The deal priced at the tight end of this range on Wednesday. 

Guala wrapped up the first EHY deal of Q4, following a series of high quality Italian double B issuers in September, like Vespa maker Piaggio and infrastructure construction company Webuild.

North of the Alps, French automotive supplier Valeo tested the market with its first green bond, offering €600m of SUNs due in 2029 with coupon of 5.875%.

On a much bigger scale, Cinven offered some hope for the thinly-supplied LBO market, tapping 15 banks and four direct lenders to finance its second buyout of the Frankfurt-listed company Synlab AG. 

The senior part of the financing will likely be in “term loans or high yield notes”, according to a person close to the situation.

On Monday, when Cinven announced the financing line-up, a senior banker told 9fin: “HY has healthy appetite from investors, and the laboratory space is going through the worst time in terms of valuation. I guess for Cinven it is a good window to buy Synlab relatively cheap and still secure some debt funding for the tender offer”.

On EHY market sentiment generally, a second buysider said: “People are a bit worried but not panicking. EHY is also a relatively short duration market so the negative impact of higher rates isn’t enormous.”

But they were, nonetheless, focused on the better quality credits.

“What I’m bearish on is the distressed, poor quality part of EHY. You’ve got zombie companies that will get washed aside as defaults pick up.”

Default rates may rise as some investment banks have pointed out recently, but high quality non-IG companies (B/BB) and carry trades can still provide returns in the HY space. 

“I’m avoiding the CCC trade,” the second buysider said, adding that they are “optimistic on the longer term outlook for EHY even if there’s some near term volatility. I definitely think the opportunities here are better than IG given yields available”.

A third buysider also offered a positive perspective: “I think there’s a lot of things to be positive on as more companies are focusing on their health by reducing leverage instead of paying out dividends. It’s a bit of a cliché but it’s true — high yield actually has a high yield right now so the carry can actually protect you even if price depreciates.”

Flows, though, told a different story. According to Barclays this week saw the largest outflow in EHY since July 2022 with outflows across both ETFs and mutual funds.

Leveraged loans

ZPG (Zoopla) has approached the market with €300m and £300m minimum TLBs due 2028 (A&Es from 2025). There is also a sterling second lien loan due 2029 (A&E from 2026) that is yet to have its size finalised.

Theramex’s €240m TLB add-on, priced on Tuesday, was a stormer as it upsized to €790m — margin at E+425bps and OID of 99.75. Such was the optimism around the deal, terms tightened from IPTs of E+525bps and OID of 99.75-100. This deal will be used to refinance its existing TLB as well as “support two bolt-on drug acquisitions”.

INEOS Enterprises came to market with its dual-currency €645m-equivalent TLB deal. The €350m leg landed on margin of E+400bps and OID of 98.5, the wide end of price talk of 98.5-99. It was a similar story for the $310mtranche — margin finalised at S+CSA+375bps and OID of 98.5 (compared to price talk of 98.5-99).

Exact Software’s €400m minimum TLB is guiding towards IPTs of E+425-450bps and OID of 99.5. Proceeds will be used to support “potential M&A” and a “shareholder distribution”.

Restaurant Brands Iberia has served up a €310m TLB due 2028. Margin is guiding towards E+450bps and OID of 99.875-100. 

Circet’s €150m minimum TLB add-on upsized to €175m — pricing at E+375bps (with ratchet)/E+325bps (effective) and OID of 98. Pricing widened from IPTs in the 98-98.5 area.

Despite some buysider concern over both size of the tranche and the business itself, Palex Medical’s €350m TLB was oversubscribed (ultimately upsizing to €370m). Pricing settled at E+475bps and OID of 98.5 (vs. price talk of 98-98.5).

A third buysider said: “We’re passing due to both the small size of the tranche and the company itself. It takes a big credit story for us to get involved in a sub-€100m EBITDA company.”

Strong technicals in the loan market continue to provide tailwinds for issuers, despite the tough macro backdrop — our Q4 Euro CLO outlook (US version here) suggests that will continue (market participants telling 9fin that 15-20 managers are in the primary pipeline).

Loans continue to be oversubscribed — leading to broad tightening across deals and smaller allocations. In other examples, existing issuers such as VMED and Altice International have opportunistically tapped the market on the back of the strength seen last week — leading to large allocations for existing investors, as deals get upsized, but not necessarily much for new buyers.

Barclays Credit Strategy underlines this point around there not being enough new loans to go around:

“Loan issuance has been near all-time lows this year at €30.5bn for the first nine months of the year, with issuers favouring amend-to-extend (A&E) activity over refinancings. Therefore, lack of supply in the loan space has pushed managers to look elsewhere for asset supply. CLO WAL tests have come under pressure and subsequently, CLO managers have had their hand forced somewhat to satisfy these limits via the bond market where there is a larger pool of shorted-dated assets.”

Forward pipeline