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Similarly, markets felt their own type of discomfort this week as rates continue their worrying ascent in the US — Thursday’s session saw the 10-year around a basis point off 5%, a level not seen since 2007.
Closer to home, this week German 10-year yields reached the 3% threshold for the first time since the 2011 Eurozone debt crisis.
Fed Chair Powell’s (an apparent constant in these LevFin Wraps) remarks at the Economic Club of New York were a big catalyst as he suggested that policy still had some way to go higher (”I think the evidence is not that policy is too tight right now”). Additionally, he pointed to persistent tightness in the US labour market that consolidates the feeling that rates will be higher for longer.
That said, Powell acknowledged that higher bond yields are tightening financial conditions — meaning that there is less work for the Fed to do (a similar message to policymakers over the past few weeks).
High yield
A sellsider said it's been a “choppy period” in the bond space — leading to issuers choosing to sit on the sidelines, making a change from the first few weeks since primary reopened in September.
“3-4 weeks ago was the best window in the whole year for companies to come to market.”
With loan issuance overwhelming EHY, a buysider confirmed that it partly came down to the fact that there is a “stronger appetite for assets that can protect against rising interest rates at the moment.”
“We might see the second wave of primary in HY somewhere in November, if inflation continues to go lower,” they said.
Another lender didn't buy this view, arguing that it depends on how the secondary market will move.
“For issuers, bonds are expensive compared to TLBs as the secondary market has not recovered yet. At this moment I don’t see any HY revival”, they said.
Investors seem to agree if you look at the flows data from the week.
Looking at market positioning, research from Barclays showed “small outflows from pan-European HY funds”.
“Outflows continued, but not to the extent seen earlier in the month. Outflows were concentrated in mutual funds, while ETFs saw inflows.”
Wrapping up what’s been an interesting year so far, Goldman Sachs Credit Strategy team wrote in a separate paper that “EUR HY gross supply is up over 40% from last year’s pace through three quarters and yet it is still on track to finish as the third lowest annual total since 2012 at just €55 billion on our current estimates.”
For 2024, they expect “a further incremental rise in EUR HY gross supply to €65 billion” due to “a growing near-term maturity wall.” The forecasts implies a less than 20% increase over this year.
In terms of net issuance, Goldman expects the EUR HY market to “flip back to flat next year after two straight years of negative net supply.”
Leveraged loans
Loans picked up from where they left off last week — a solid supply of deals hitting the market.
Ceva Sante’s large dual-tranche 2030 TLB deal started things off. The €1.8bn euro leg is guiding towards E+425bps and OID of 99-99.5 whilst the dollar portion (€500m equivalent) is heading towards S+425bps and OID of 99.
Following the identical margin for both currency legs, a second sellsider said Ceva Sante’s size and stable sector (veterinary pharmaceuticals) brought pricing tighter: “It underlines that investors are searching for quality — there’s no premium if they’re big.”
Dividend recap deals were welcomed with open arms this week — somewhat surprising at first glance given the lingering macro uncertainty.
A third sellsider said: “The market has proven to be receptive to recaps — especially if we avoid the gloomy recession outcome.”
Action Retail’s upsize certainly suggested that was the case as the Dutch non-food discount retailer settled on a $1.5bn TLB due 2030 (from $1bn). The deal landed on S+325bps and OID of 99.25 (slightly tighter than talk of S+350bps and OID of 99).
As 9fin wrote earlier this week, the deal was praised by investors for its solid fundamentals — making a dividend a lot more palatable.
“It’s a non-conversation really, it’s such an easy yes when it comes across my desk,” said a second buysider. “It goes from outperformance to outperformance, we’ve been in the name for a while and always look to pick up more when we can.”
A third buysider concurred, highlighting its status as a star within the non-food retailer sector:
“It’s probably the only one worth having a look at. It’s a very strong name, the margins are a a bit lower for a dividend deal but I can accept it given the business record.”
German software company SUSE also rode the upsizing wave — its initial €500m TLB deal has been bumped up to $1.2bn equivalent across euros and dollars. Initial price talk is guiding towards a margin of +450bps and OID of 98-98.5 over both currencies.
Etraveli’s loan deal also took off without much turbulence — its €465m 2028 TLB priced at E+500bps and OID of 98 (from IPTs of E+475-500bps and 98). Check out 9fin’s coverage here.
Again, investors were comfortable with the company’s fundamentals — justifying sponsor CVC’s decision to return cash to investors (especially after the Etraveli sale to Booking Holdings was thwarted by the European Commission in September).
“I haven’t seen many taking out a dividend. But they [Etraveli] have good cash levels and quite a lot of equity too, so I understand why CVC did it.”
Given the clamour for new paper as CLOs continue to print, a fourth sellsider said that: “People might complain about a dividend recap, but ultimately it’s better than just a refi or repricing — it’s not just the same thing extended.”
For Minimax’s dual-tranche 2028 TLB (A&E from 2025), the dollar tranche increased from a $500 minimum to $570m. Pricing tightened to S+275bps and OID of 99.75 (versus price talk of S+275-300bps and OID of 99).
The euro leg also tightened — €490m tranche (versus €450m minimum) landed at E+325bps and 99.75 OID (versus price talk of E+325-350bps and 99 OID).
Delachaux’s €770m 2029 TLB A&E steamed into market, pricing at E+425bps and OID of 98.5 (in line with talk on margin but at the lower end of the 98.5-99 OID).
A fourth buysider was comforted that the company was an established, family-business — suggesting that management would be sensible on behalf of investors in an uncertain economic environment.
“I really like that there’s family ownership involved. They’ve been around for circa 120 years so they’ve probably seen more business cycles than we’ve had hot dinners. I don’t expect them to do anything aggressive.”
Offsetting concerns about cyclicality, the fourth buysider said: “Thankfully they’ve got a really good order book and infrastructure is such a long-term play.”
Aggreko’s €240m add-on priced at E+525bps and OID of 99.5 (versus price talk of E+525bps and OID of 99-99.5).
Despite the fourth buysider saying that the deal was looking “so good” on a relative value basis, they admitted to it “not being the easiest pitch” due to its small size.
