European LevFin Wrap — Sweet start for syndicated but investor pushback begins

Karis Hustad

23 February 2024•7 min read

It’s been a sweet start to the year for the syndicated leveraged finance markets. Lower margins have enticed companies and sponsors back from private credit, leading to new money in the market and underscoring the strength of a broad distribution.

There’s optimism in the wider capital markets, mostly driven by red-hot stock markets. Nvidia’s AI-fueled earnings led to the biggest single session gain in value of all time. Coming alongside lower than expected jobless gains and larger than expected continuing claims in the US, the S&P 500, Nasdaq 100 and Dow Jones indices hit new all-time highs, with similar strong gains in European equities — setting a strong tone for deals to get done.

Meanwhile hopes for 2024 rate cuts are feeling increasingly unlikely – Deutsche Bank research pointed out that Fed funds futures saw expectations of a 2024 rate cut drop to a three month low, and expectations of a ECB rate cut by June fell as well.

Despite the stock market excitement, primary loans started to see some investors coming down from the sugar high.

There were three instances this week of more challenging credits changing their docs to get deals over the line. That’s not in itself unusual, and some of the pushback was pretty standard stuff (two margin ratchets is market, come on!).

But it’s still a change from the euphoric atmosphere a few weeks back, when almost every deal was sailing through with an upsize and reverse-flex to boot.

Swedish infrastructure company Eleda sparked discussion made changes just ahead of pricing its €918m 2031 TLB this week. After lenders expressed concerns over Eleda’s delayed-draw TLB structure and loose covenants, the docs were reworked to tighten leverage ratios and basket sizes across various forms of indebtedness, and tidy up its margin ratchet (from three steps to two). It also added in a required annual lender call.

The changes also addressed a loose ticking fee structure, particularly on its delayed-draw term loan (DDLT) — previously, lenders only got a ticking fee on the DDTL on each utilisation date. The delayed draw tranche is €153m, while the drawn debt tranche is €765m.

Some changes — like a 12 month MFN sunset, instead of the standard six month — are more restrictive than the market norm.

The deal priced at the wide end of talk, coming at E+450bps and 99, from talk of E+425-450bps and 99.

Payments provider Planet also priced its €910m TLB after last minute docs changes. The deal, which refinanced outstanding debt including a private credit unitranche facility, priced at E+500 at 97 after the company asked for recommits and pushed the original deadline. Initial price talks were at E+500-525 at 97.

An add-back heavy EBITDA had caused some leverage concerns for lenders, though a supportive sponsor and successful diversification was attractive.

Finally, French payments services company Ingenico had commits due midday February 22, but it didn’t price until over 24 hours later — coming at the same E+500bps and 98 level as the talk, but again, featuring docs changes.

Private credit fightback?

Meanwhile, the private credit funds are starting to mount a defence.

The lenders backing Silver Lake's Italian price comparison platform Facile have repriced the loan from 600bps to 500bps— the first reported case of a repricing in the private credit market this year — and agreed on due to “a real threat” of refinancing the loan in the broadly syndicated market, sources told us.

There may be more ahead: ”If a loan done at 6x or 7x leverage at 625bps de-levers down to 5x leverage then the borrower should ask for a repricing,” said a market source.

In 2023, private credit pricing ranged between 550bps and 900bps, according to 9fin data. This was tighter at the upper end of the market: among private credit deals involving companies with €50m-plus EBITDA, it ranged from 575-675bps, according to 9fin’s European Private Credit FY 2023 Review.

In the final quarter of the year, there was evidence of pricing beginning to fall, with particular pressure among large-cap deals given the increased competition from the BSL market. (Our private credit colleagues looked at the data and what it means — read the piece here.)

That being said, it’s not likely that the BSL market is going totally sour. New announcements are still coming thick and fast, and refinancings and repricings are set to continue. We’re hearing rumblings of deals to come — including a travel and leisure bond and a healthcare loan in premarketing, with more private credit refinancings on the way. “Expect April to be very busy,” said one 9fin source.

Speaking of April and private credit takeouts, KKR-owned French insurance broker April is seeking a €1.2bn TLB to refinance its existing unitranche debt and fund the acquisition of DLPK. KKR bought the company in an all-equity deal at the end of 2022, a challenging year for debt financing, re-levering it shortly afterwards with the credit arm of previous sponsor CVC.

French hotel operator B&B Hotels is out seeking a €1.25bn TLB refinancing, with price talk at E+425-450bps and 99.

Dutch specialty ingredients supplier Barentz is on the market with an extension of a total €1.21bn dual currency TLB from 2027 to 2031. This includes a €725m TLB, with price talk at E+400-425bps and 99.5, and a €485m-equivalent dollar-denominated TLB with price talk at SOFR+425bps and 99.

IK-backed equipment rental company Renta is offering a €550m TLB to extend an existing €200m TLB due 2028 and refinance €350m in FRNs due 2027, extending the maturity date to July 2030. Price talk on the Swedish company’s deal is E+450bps and 99.5-99.75.

UK convenience retailer Motor Fuel Group is also seeking a £800m-equivalent loan to fund the acquisition of Morrison’s forecourt portfolio, split between a euro-denominated TLB with price talk at E+450-475bps and 99 and a sterling TLB with price talk at Sonia+575-600bps and 98.

This is part of a £1.6bn debt package led by BNP Paribas, Deutsche Bank, RBC and SMBC. Sponsor CD&R (also the owner of Morrisons) will contribute an additional £650m in preferred equity as part of the transaction, while Morrisons will keep a 20% stake in MFG valued at £550m.

A few deals beyond Eleda, Planet and Ingenico also wrapped up.

Irish telecoms provider Eir priced a €600m TLB A&E at E+350bps at 99.5, the wide end of E+325-350bps and 99.5 talk, representing a slightly uplift to its current facilities which have an E+325bps margin.

Finally, Dutch plant-based food maker Upfield priced a €400m TLB at E+500bps and 98.5, alongside a $300m TLB priced at S+475bps and 98.5.

High yield

Despite another low volume week for high yield primary, as earnings season keeps issuers out (see here for 9fin’s earnings digest on Recordati, Oriflame, Transcom, Douglas, Consolis, Ardagh Metal Packaging and Verisure), investors are still keen on the asset class.

According to Barclay’s research, during the seven-day period from 15 to 21 February, saw continued strong inflows into PE HY. “The market has now seen sixth consecutive weeks of large inflows – worth 3.4% of AUM – and inflows in 15 of the last 16 weeks,” according to Barclays. “In terms of valuations, the OAS of the €-IG index was 6bp tighter over the period while PE HY was 14bp tighter.”

JP Morgan’s research team pointed out that this comes during a time of “lacklustre” returns, as high yield is currently providing just +.7% returns. However, the continued inflows indicate that there are reliable gains ahead.

“This is partly just unlucky timing with the top in the market coming right at the end of December, with both asset classes still having great returns on a three, six or twelve month horizon,” says JP Morgan. “Consequently, we are not seeing the outflows which would typically be associated with losses.”

The sole primary outing came from car rental giant Avis Budget, which launched a €400m 5NC2 SUN deal on Tuesday, following the US holiday on Monday. Proceeds will be used to redeem all €350m of its 4.75% 2026 SUNs, with the remainder for general corporate purposes and potentially further debt repayments.

The deal was talked at 7%-7.125%, and increased to €600m, before closing at the tight end of talk on Wednesday evening. Do read 9fin’s Credit, Legal and ESG QuickTakes for more!

9fin’s legal team have also been looking back over the high yield issues of 2023 — we recommend their covenant trends report for the year, to be found here.