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This week we saw the release of something across the pond that many think will shape the near-future.

And no, we’re not talking about Facebook’s Threads. That said, let’s see how long it takes before I’m on yet another social media app…

We’re of course referring to the Federal Reserve’s minutes from its latest FOMC meeting confirming that June’s decision was a hawkish pause. 

Despite the minutes saying “almost all participants judged it appropriate or acceptable to maintain the target range for the federal funds rate at 5% to 5.25%”, some Fed officials favoured a 25 bps hike.

The Fed is still concerned about sticky inflation — minutes pointed to a strong labour market and high shelter inflation. 

At the time of writing (hat-tip to Jim Reid and the team at Deutsche Bank for the data): Fed futures are indicating 33 bps of hikes through the November meeting with an 85% likelihood of a hike in three weeks’ time at the July meeting.

As we mentioned in last week’s European LevFin Wrap, Europe will also continue to push on with tightening — a July hike “very likely” according to Lagarde. 

Staying closer to home, markets are now anticipating the highest borrowing costs since 1998 for the UK — with a 6.5% base rate priced in for March 2024.

Clearly, central banks are sticking to the message that more hikes are needed to combat inflation that’s still too hot.

For a lot of people this week, things were too hot for a different reason as J.P. Morgan’s Corporate Challenge took place in London on Wednesday and Thursday.

“I thought I was having a heart attack,” said one buysider, “but I tried to pass it off since I was in company swag.”

Unlike some runners, a sellsider said the market was “generally cruising along” — still optimistic that deals could be done in the second half of the year.

“The market has overall been pretty resilient. Right now, we’re building out our pipeline for new deals for post-summer.”

A second buysider concurred: “In September you’ll see a bunch of deals landing”. 

As John Authers wrote this week — pointing to research from Absolute Strategy Research which covers around 250 asset managers across the world: “There is still no great optimism about the economy, but many are surprised that we do not already have a downturn, and certainty is falling”.

Even though pessimism on the economy is slowly reducing, the sellsider said that investors will still be positioned defensively in H2.

“Less cyclical, growth-driven industries like technology and healthcare will be favoured in the second half of the year.” 

Spanish energy transition company Amara Nzero came to market with €270m of 5NC2s — pricing at 10.25% (in line with talk) and OID of 100. 

9fin clients can check out the Credit, ESG and Financial QuickTakes we did on the name earlier this week.

The second buysider was comforted by the company’s lack of debt as this is Amara’s first bond deal, adding to the €50m RCF also due in 2028.

“At 4.9x [gross total leverage], there’s a pretty big equity cheque. On top of this, the bonds are Senior Secured so there’s nothing ahead of you.”

The second buysider also praised the company’s underlying business — putting it ahead of peers like Rexel.

“It generates cash with hardly any capex costs; it has a similar business but Rexel has no growth on it. Growth for Amara is great.”

Despite the buysider pointing to thin margins, they were impressed by the business elsewhere. 

“Thin margins are an issue but I think these guys can add value to their customers through logistical and technical expertise. They also offer good flexibility and variety.”

They also commented that pricing was “cheap spreadwise” and predicted its status as a green bond will give it some extra demand going forward.

American vehicle rental services company Avis Budget tooted its horn at European markets this week with a €400m issue of 7NC3s — pricing at 7.25% and OID of 100, in line with IPTs of low 7s.

The sellsider, who was familiar with the deal, said prior to pricing: “I’m expecting the deal to go quite well as Avis has performed very well in recent years. I’m expecting low 7s”.

Spanish gambling company Cirsa also tapped markets for a two-part bond deal maturing in 2028 — split across €325m in SSFRNs (priced at E+450 bps and 98 OID) and €375m in SSNs (priced at 7.875% and 100 OID). 

The deal upsized from an initial €650m combined size — a €50m bump. On the floating leg, margin tightened from IPTs of E+450-475 bps as was the case for the fixed leg which saw margin tighten from IPTs in the 8% area (+/-0.125 bps). 

Rounding off the EHY primary deals, German plastic producer Profine priced €380m of 5NC2s at OID of 100 — price tightening from IPTs of mid-to-high 9s to 9.375%. It was a good week for the name as Moody’s also upgraded its rating to B2 — citing “its leading position in the fairly oligopolistic PVC window market, improved liquidity thanks to the upsized RCF as part of the proposed transaction and strong management track record”.

As the market continues to push on, Craig Nicol and the Barclays European HY Credit Research team have been asking some relevant questions on risk-reward baked into current EHY yields.

In their piece named No room for error they point to corporate vulnerability if we see earnings revisions.

“Despite the safety net of high yields, we think the asymmetry of spreads is unattractive given limited tightening potential, with little room for error if the macro outlook worsens more than we expect.”

Although yields (YTW) have steadily crept up, following central bank hikes, spreads (OAS) have been falling or treading water over the last few months — suggesting they’re not compensating investors for recession risks.

Source: Barclays European High Yield Credit Research

“We think the asymmetry of spreads is the poorest it has been for some time. Spreads partly reflect what investors should be compensated for defaults. For example, assuming a historical average excess spread, current spreads are pricing in a 12-month forward default rate of 2.0-2.5%. Spreads below 400 bps suggest a default rate of below 2.0%, which we would argue is too optimistic.”

The second buysider agreed that markets are “a lot more optimistic” but said he believed “markets are fairly priced given that spreads don’t look that rich”. 

“People have been positioned the wrong way round as CCCs rallied — rebounding from the end of last year.”

Fresh off the press, check out 9fin’s European LevLoans H1 Trends Report as we look at the half that was and see what else could be in store for 2023 in loan primary and secondary markets.

Margarine mammoth Upfield finalised its €3.89bn-equivalent (€2.375bn, $833m, £656m) TLB A&Es ahead of an IPO in H2 2024, according to buyside and sellside sources.

Pricing was mixed across currencies — with slight widening in euros, minor tightening in dollars and sterling coming in line with talk. The euro tranche settled at E+500 bps and 97.5 OID, dollar tranche at SOFR+475 bps and 97.5 OID and sterling at SONIA+575 bps and 97 OID.

As 9fin wrote earlier this week, a second buysider who was involved in the deal said: “I’m not sure this A&E gives them enough space to bring leverage down to a place where they can IPO. I think leverage will be in a place to refi the SUNs, but IPOing is a different matter and a different timeline”.

Elsewhere, French engineering group Expleo downsized its 2027 A&E TLB — from €494.4m to €485m — pricing at E+500 bps and OID of 96. Its £50m pre-placed 2027 TLB priced at SONIA+650 bps and 96 OID.

In line with the idea that the market is becoming less pessimistic, 9fin wrote that “the credit is one of a string of B3 borrowers that have come to market in recent weeks, as buysiders get more comfortable with riskier names and increasingly hungry for paper”.

On the smaller side and continuing with the French theme, metal shelving company Stow — formerly known as Averys— is pricing a €490m TLB A&E. Initial price talk is guiding towards E+500 bps and OID of 96-97. Commitments are due 13th July.

Finally, British nursery operator Busy Bees buzzed swiftly in and out of the market with a €175m TLB add-on that priced at E+375 bps and OID of 93.5. Moody’s wrote that the company’s rating is unaffected by the add-on, pointing to expectations that the “the company will maintain good operating performance, maintain leverage below 7.5x over the next 12-18 months, and refrain from large debt-funded acquisitions and shareholder distributions”.

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