Major central banks delivered an early Christmas present and decided to hold key interest rates in their last meeting of 2023, opening the door to small cuts in the first half of 2024.

This move sent 10 year Treasuries under the 4% threshold and the 10 year Bunds toward 2% (it was 2.9% in September), with the iTraxx Crossover tightening to 367bps from 471bps in October.

The Federal Reserve and Bank of England seem to agree that hiking interest rates is no longer needed and kept rates at 5.25%-5.5% and 5.25% respectively for the third consecutive meeting.

But if, on the other side of the Atlantic, Goldman’s research team are projecting three consecutive 25bp cuts in March, May and June — in line with latest dot plots — the UK is already falling behind in the dovish race.

As CPI is still high (4.6% YoY in October), one third of the MPC voted in favour of another rate hike this week, with market pricing a small cut of 35bps by the June meeting.

In Frankfurt, ECB president Christine Lagarde held rates at their highest level for the second meeting in a row and used a more subtle technique to ease conditions, by announcing the timing of the PEPP reduction.

“Getting the PEPP announcement out of the way now reduces the hurdle to earlier rate cuts in 2024. While the PEPP exit makes it appear like the ECB is not shadowing the Fed’s dovish pivot, it may have subtly opened the door,” Mark Wall, chief European economist at Deutsche Bank, wrote in a flash note.

The latest central bank signals could pave the way for a new wave of issuance in 2024, even if most of the 2025 maturities have been already tackled and pushed to 2028 or beyond.

“We’re seeing the end of tunnel, but the world has changed, we’re probably in a more elevated interest rate environment for longer,” said a levfin banker. “But loans and high yield markets are 100% open.”

“Markets are leaning too heavily on a soft landing scenario, where inflation is disappeared and the economy shows growth. Nobody is really pricing geopolitical risks anymore, everyone is running. That's the greatest danger,” a buysider told 9fin.

High yield

No new bonds were announced this week, though Synlab wrapped up its LBO financing. The Santa rally continues with HY markets reporting inflows across €-IG and PE HY funds, according to a Barclays research. 

However, these were modest compared to the previous bumper week, with EHY fund flows being in the 48th percentile.

While EHY borrowers issued a total of €53bn in 2023, an 8% rise from the €40bn issued in 2022, refinancings dominated, representing 66% of total issuance. LBOs on the other hand were few compared to previous years, with only six deals going the bond syndication route.

See 9fin’s full 2023 High Yield wrap here. 

JP Morgan expects bond issuance to increase substantially as 2025 maturities approach — paired with a small drop in loan market activity as there’s been “greater progress that has already been made in terming out liabilities,” according to its European Credit Outlook and Strategy report for 2024.

In EHY, the headline figure for 2024 is €80bn gross/€5bn net. For loans, they forecast €55bn gross (including amend-and-extends) and €5bn net.

Their analysts project some bond-for-loan refinancing given strong CLO demand as well as a greater preference for flexible floating rate liabilities in an environment when rates have most likely peaked.

Meanwhile, in a FICC research credit report from early December, Barclays believes that the most likely predictor for bond performance in 2024 is 2023, with “historically high yields, spreads which rank close to the historical median, defaults rising but manageable and decent returns but with high levels of dispersion representative of elevated idiosyncratic risks.” 

The bank forecasts that EHY spreads will end next year at 425bps with a +6.25% total return, roughly in line with this year.

Credit: Barclays

Looking at the secondary market, Hurtigruten’s €300m 3.375% SSNs are the biggest gainers this week after the company announced a much-anticipated ‘holistic recapitalisation’ of its loans. The February 2025 bonds were unaffected by the soft restructuring and the company plans to refinance them once the transaction is completed in February 2024. 

The loan recap includes a conversion of cash interest to PIK, reducing cash pay debt by around €500m. There is €133m of new money from new facilities, with the remaining debt bifurcated between the OpCo and a new HoldCo. See 9fin’s full coverage here.

The Norwegian cruise liner delayed its Q3 23 results by two weeks to finalise proposal to negotiate with lenders, just 10 months after completing its first restructuring.

Weekly high yield movers

Leveraged loans

Several recent deals cleared the market this week, many with tightened pricing as investors sought to stay invested in solid credits and put cash to work in a confident market.

Synlab, which went into the market seeking a €900m TLB — with price talk guiding towards Euribor+475-500bps and OID of 98 — and €550m of 7NC3s, originally talked at 8.25% area. These deal terms were provisional, with the possibility of increasing or decreasing each instrument by up to €100m. Execution appears to have been strong, particularly on the bonds, with 7.875% the final level, while the loans came in at E+475bps and 99. 

That likely reflects general undersupply of the market, the familiarity of the name among leveraged credit investors, and initial loan talk which investors felt was generous. See here for more. A sellsider not on the deal said that “because of where current coupons are, investors will be throwing themselves in at these levels, hence the big tightening. There’s a first mover advantage in issuing bonds given the undersupply, and there’s a big appetite for duration at the moment given expected rates cuts”.

Despite the more expensive headline cost of the loans (867bps given Euribor at 392bps at pricing), Synlab and sponsor Cinven opted to increase the loan tranche by €100m and scale back the bonds.

Just as investors are positioning for rates cuts by trying to add duration, sponsors are also anticipating rates cuts to come, and want to avoid locking in three years of call protection when they can get a prepayable TLB at reasonable levels. 

Meanwhile, banks running Carlyle-backed German clinic group Schön Klinik’s €350m TLB were able to tighten pricing from its initial spread of E+475-500bps at OID of 98 to E+450bps at OID of 99, illustrating a strong demand for the credit. 

It did not convince everyone, with one buysider commenting that the company was too small in scale and overly exposed to Germany, also highlighting regulatory risk.

However in the end, “the pricing was strong and the deal was oversubscribed,” according to a source close to the transaction. See our Loan Legal QuickTake here.

The €350m TLB repaid €77m of RCF drawings, €200m of TLA, €50m of real estate loans and €19m of promissory note loans. It was marketed off a September 2023 LTM structuring EBITDA of €159m, bringing total gross leverage 4.6x and total net leverage to 4.2x, with cash and cash equivalents at €58m, according to buyside sources.

Bookrunners JP Morgan and Bank of America declined to comment. Carlyle declined to comment and Schön Klinik did not respond to a request for comment.

Advent-backed gas turbine and energy generation company Innio sought a €1.6bn-equivalent A&E, looking to extend its 2025 maturities to 2028. While there was some concern over energy price volatility and geopolitical risks, investors had a broader positive view on the business as well as its future deleveraging. The company should have gross leverage of 4.1x at the end of this year, but is targeting 2.3x gross leverage target in 2028.

Initial price talks for the A&E were at E+425-450bps at 98.5 OID for its minimum €900m 2028 TLB and S+425-450 at 98.5 for the minimum $500m 2028 TLB. In the end, Innio priced a €1.1bn TLB at E+425bps with an OID of 99.5 while the $600 TLB ended up at S+425 at an OID of 99.5.

French drug delivery systems provider Nemera, jointly owned by Astorg and Montagu, also wrapped up an A&E. Initially aiming for to extend the maturity on its €590 TLB from 2026 to 2029, price talks were around E+500bps with an OID between 97.5 and 98. It priced and allocated a €525m TLB priced E+500bps at an OID of 98.5, alongside a $75m TLB priced S+500bps at an OID of 98.

Also, Bain-backed Zellis Group (formerly known as NGA Human Resources), a UK-based provider of specialist software and HR outsourcing services, priced a £405m A&E. The deal included a £365m TLB maturing in January 2028, priced at S+575bps at an OID of 97.5, and a £40m RCF maturing in April 2026. 

The loan will be used to repay existing term loans and RCF drawings (which included a £293m SS 1L TLB due January 2025, a £27.5, SS 2L TL due January 2026 and a £40m SS 1L RCF currently drawn by £11m, according to Moody’s). The sole physical bookrunner was SMBC.

In the twelve months that ended in September 2023, the group generated £211m of revenue and £73m of company-adjusted EBITDA, according to Moody’s. The ratings agency noted a growth in revenue and EBITDA, driven by migration of customers to the company’s new HCM Cloud platform, inflation-linked price adjustments and new business sales. 

The road to pricing terminals operator Euroports refinancing wasn’t as straightforward. After going to market aiming to increase its first lien TLB from €315 to €500m with a proposed spread of E+450-475bps alongside a pre-placed €70m second lien (down from €105m previously) at E+700bps, both at an OID of 98, investors voiced concerns over the ownership structure which could mean a sale of majority shareholder R-Logitech’s 53% stake.

Euroports ended up extending its commitment deadline from December 12 to December 14 and widening pricing from initial talk. Sole lead JP Morgan allocated a downsized TLB of €490m priced at E+500bps and 97, and an upsized second lien of €73m priced at E+725bps also at an OID of 97.

Now, the deal only partially repays RCF drawings and puts some cash on the balance sheet.

French security services company Idemia also finalized its €250m fungible add-on paying E+475bps at and OID of 99.75 to repay preferred shares and to pay transaction fees.

Overall, the last few weeks have demonstrated the extent to which 2023 was a “window market” — 25% of the total issuance was pushed out in the top five weeks of the year — these were in late December, late September, early November, as well as early July.

“There have been moments in the year, as in July, where the market gave us a decent range of deals to contemplate. But overall, it's been a pretty mediocre year,” a CLO manager said.

According to 9fin data, €76.7bn of leveraged loans were issued in the last 12 months versus €43.9bn in 2022, but 55% of those were A&Es. The overall number posts a 74% increase year-on-year, but it’s a gloomy picture against the heights of 2021 and 2019, when issuances reached €146.142bn and €82.77bn respectively, and when new money deals featured much more heavily. Dealmakers are hoping for a boost in the year to come.

“We haven’t had a lot of deals, that's self evident. Everybody needs more issuance,” said a CLO manager.

Weekly leveraged loans movers

Forward pipeline