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Alessandro Albano

If the puddles and breeze are anything to go by, London’s summer is ending pretty soon so get your turtlenecks ready.

The weather is also changing at the central banks, with hiking cycles at both the Fed and Bank of England’s seeming to near an end as they decided to pause this week. Looking under the hood of those decisions, investors have been left speculating how long it is before we see cuts.

Despite the FOMC keeping the Fed Funds rate on hold, there were hawkish undertones from the Fed’s Summary of Economic Projections. In short, the median FOMC member is pencilling in only two rate cuts in 2024, after one more hike this year. What’s more, the newly published projections for 2026 showed the median dot at 2.9%, still above the long-term projection of 2.5%.

Powell’s press conference did little to assuage fears of higher rates — saying that he “would not” have soft landing as a baseline expectation (even if he clarified later that it is a primary objective for the FOMC). On rate cuts, he said that the FOMC was “never intending to send a signal” with its dot plot and that “there’s so much uncertainty around” this.

The Bank of England kept policy rates at 5.25% — ending a run of 14 consecutive hikes. It followed UK CPI hitting an 18-month low of 6.7% on Wednesday — a surprise to many economists. Despite the pause, there was an element of hawkishness with this decision too as it was a narrow 5-4 vote among the Committee (four members preferring to hike by 25bps). 

From a flows perspective (h/t to the Barclays Credit Research team for the data), EHY continues to see outflows as investors coalesce around the idea of higher rates for longer. This has been driven by ETFs despite some mutual funds seeing small inflows; it’s the eighth week of outflows in the past nine weeks.

The seven-day period from Thursday to Wednesday (14-20 September) again saw inflows into €-IG funds versus outflows from EHY funds — suggesting that investors prefer the risk-reward available in IG which allows them to clip historically high yields and potentially benefit from price appreciation as rates come down.

Given the prospect of higher rates for longer, one sellsider bifurcated the EHY market into haves and have nots — expecting the former to dominate investor attention.

“The haves possess defensiveness, an ability to pass through costs and are generating considerable cash right now.” 

Linking to the last characteristic, a second sellsider said that the current environment leads to interest coverage growing even more in importance as a metric — alongside leverage ratios (which get plenty of attention from credit investors). 

As the tougher interest rate environment inevitably brings more corporate casualties, a senior representative from a credit rating agency said that EHY is still attractive as an asset class, with the assumption of ”low single digit default rates” ultimately offset by current yields around 8%.

In a week full of primary activity, Cheplapharm dropped a planned FRN tranche and instead priced €300m SSNs due May 2030 at 100.5, tighter than the par IPTs, with coupon in line with existing debt at 7.5%. The decision to avoid a floating rate underpinning some of that anxiety mentioned before regarding how high rates could go. 

Next up, Italian infrastructure construction company Webuild took a bite out of its near term maturities this week, issuing a new €450m unsecured bond to fund a partial buyback of its €500m 1.75% 2024s and €750m 5.875% 2025s.

The new issue pays a 7% coupon, but was issued at a slight discount to yield 7.25%. The deal tightened from IPTs of low 7s and guidance in the 7.375% area; it was also upsized from an originally targeted €400m size.

After FNAC Darty’s decision last week to pull a bond, some investors feared a backlash in the primary market as EHY bond supply has been dominated by double-B names (such as Boels Rental, Rexel, ZF Europe and now Webuild).

“If Webuild does well, other double-Bs will come but there will be more demand in Q1 2024 when investors tend to rotate their portfolios. We might see more single Bs in the market towards Q4, with more double-Bs testing the waters right now”, an investor told 9fin.

Despite dollars taking the lion’s share of the financing package, the monster $8.4bn-equivalent financing for Worldpayundoubtedly caught the attention of investors this side of the pond — and that’s not just because of the €500m TLBand £600m of 8NC3s on the docket. Euro-based lenders got a rough deal, with the originally planned $1bn-equivalent euro loan cut down during syndication, with a massively increased ($3.4bn to $5.2bn) dollar loan anchoring the financing package.

A third sellsider, not on the deal, said the deal would be a bellwether — indicating how open the market is to deals that are not only large but multi-currency too. Sponsors would also be watching closely so they can gauge how successful the LBO machine is chugging along.

Prior to pricing, which came in tighter across all bonds and loans, the third sellsider said: “Worldpay is a very important test for the credit markets. If it’s successful, it means we can move the bar higher…and vice versa if not.”

Demand was strong enough to allow the sponsor to slim down the equity contribution by $250m at the end of syndication.

Some eyebrows were elevated at the sight of a chunky sterling bond tranche (the last HY GBP bond greater than £500m was the privately placed Morrisons in April 2022, and the last public deal was 2021) — and some of that wariness was perhaps behind the eventual downsize from £700m.

A fourth sellsider, also not on the deal, said pricing reflected “some ongoing suspicion” around sterling but pricing got to a place that made sense, with a premium against dollars and euros. Pricing landed at 8.5% (vs 7.5% for the dollar tranche and E+325bps for the euro loan tranche) after IPTs in the high-8s. 

Nevertheless, it shows that there is demand for sterling as part of large and liquid deals — even if it would be “more difficult in isolation”.

Zooming out, high yield bonds are having a solid year, up 6.3% over the last 12 months in Europe, according to a report by Schroders.

This is because around 70% of the returns have been from carry. The asset class has a yield-to-worst of 7.5% today, which is only 0.2% higher than this time last year, despite the banking crisis in March, an increase in defaults and interest rates.

“Investors in leveraged credit will earn carry that will likely lead to strong total returns over time and offers significant downside protection in adverse scenarios, if held for the medium term,” Schroders said in the report. 

Premium schools organisation Nord Anglia Education managed to shave costs off its outstanding TLBs (amended and extended this January) through a repricing. Its €1.5bn 2028 TLB priced at E+425bps from E+475bps existing. Meanwhile, its $906m TLB landed at S+400 from S+450bps existing. 

OID also landed on the tighter side — final pricing was par despite price talk of 99.75-100 across both legs.

It represents a trend of emboldened issuers we’ve been seeing since primary reopened — exemplified further through Cegid’s €700m TLB non-fungible add-on which is part-funding a €1.09bn dividend to sponsors (a €400m HoldCo PIK is covering the balance).

“There’s significant re-leveraging, so we’re never happy about that, but they’ve kind of earned it given the deleveraging they’ve done so this isn’t a particularly frustrating one,” said a buysider. “The credit story is there, so it’s a relative value question.”

As 9fin has written: “Lender acceptance of dividend recaps (for the right credit) has clearly improved — especially when compared to summer’s outset.”

Timing of the deal accelerated and pricing tightened — the revised margin was cut to E+375bps (from E+425-450bps) while OID tightened to 99.5 (from 99).

Infra Group is in market for a €600m 2030 TLB, with commitments now due Monday, following an acceleration of the timeline. The Belgian infrastructure services provider is showing updated price talk of E+425bps and OID in the 99-99.5 area (from IPTs of E+450bps and 98-99). Doc changes have also been announced.

A second buysider was complimentary — citing sector tailwinds, good market share and “high cash conversion”. 

“It feels like one where docs will be weak and pricing will be tight given the profile and market technical but let’s see,” said a third buysider.

US-based Rocket Software announced a €400m 2028 TLB (alongside a $1.6bn 2028 TLB), as an amendment and extension of its existing $2.03bn euro and dollar facilities due 2025 — price talk is guiding towards E+475bps and OID in the 98-98.5 region. 

Irish machinery manufacturer BME is looking for a €750m 2029 TLB A&E (from 2026). IPTs are pointing towards a margin of E+475-500bps and an OID of 98.

Last but not least, margarine mammoth Upfield has launched a €100m 2028 TLB add-on — price talk for margin is at E+500bps with OID at 97.5. It follows announcement of an upsized $215m (from $100m) 2028 TLB add-on.

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