A one-stop shop for all your restructuring needs 

Distressed and Restructuring

Benchmark prior transactions, bonds, loans or company profiles using over 300 credit metrics.

Comparables

Full Financial profiles with 3 statements, KPIs, segment splits & credit metrics. All traced to source documents.

Financials

AI transcripts & instant analysis, making earnings season easier than ever.

Earnings

Say goodbye to CTRL + F with our powerful search. Thousands of documents text searchable for any keyword or phrase.

Search

A full suite of ESG data and analysis. Built for your workflow

We use AI to aggregate newsflow from 2,000 sources, and deliver it to your inbox quicker than anyone else.

News

New deal analysis & covenant comparison tools, understand key risks in seconds not days.

Covenants

We've successfully predicted more than 65 price sensitive events - before they happened.

Deal predictions

Track high yield deals from issuance through to maturity, with integrated legal, credit and ESG analysis.

High Yield Bonds

Unlock new business with the most impactful CLO market content married with elegant data analysis tools.

Structured Credit 

Shine a light on private markets with 9fin's news and legal analysis of syndicated loans

Leveraged Loans

Find information others can't see in one of the fastest growing corners of finance

Private Credit 

Laura Thompson

An inflation-driven bifurcation in credits and pricing is to come in a busy Q2, say buyside and sellside sources, as issuers rush to get ahead of biting energy cost rises and weakened consumer demand in the second half of the year.

Lenders could see some inflation-inflected names come in 100 bps above more stable names, according to one syndicate banker, as H2 recession expectations sees lenders turn their back on sectors including Leisure, Retail and Consumer Discretionary. For now, the buyside and sellside alike are keeping keen eyes on the first flock of leveraged loans to land in European Lev loans after a shut down following Russia’s invasion of Ukraine, tussling to work out how pricing should accommodate a rising risk environment.

“This feels like a moment of reset,” said one buysider. “There needs to be a reset in terms of pricing and in terms of docs that recognises both pressures in the market [the Ukraine war and inflation]. Right now, things are in investors’ favour, but that could easily slip away within a few weeks.”

For their part, four buysiders estimate that inflationary pressure and the market shutdown should mean a reset of around 75 bps in primary credits from pre-war levels, with three more agreeing there will be a coming bifurcation of names along inflation lines.

“The CLO herd will quickly flock to the same exact type of credits, which gives opportunities to other, inflation-impacted credits, where they might be offering handles in the 500s at 96 OID for those willing to take a differentiated view,” said the first sellsider.

Now, with the primary wheels beginning to turn again, the question is whether issuers will have to make concessions to entice lenders back in, or whether CLO demand will tip things quickly back in their favour. “There were a lot of conversations going on about where the market should open, and when the private IVC deal came out at 475 bps, people saw that as setting things,” said the banker. “CLO managers were enthusiastic about this price point, but that is already tightening, particularly the concessions that were made on the OID side.”

New loans conceded an average of -1.1 points of OID in Q1, almost double Q4 2022’s -0.6 points. While excluding Covis Pharma’s outlier of a 90 OID lifts Q1’s overall total back to -0.8 points, taking February and March alone sees an average concession of -1.4 and -1.3 points respectively. So far, April has continued the trend at an equal -1.3 points.

“The next few weeks are going to be incredibly interesting,” said a second buysider. “I’m nervous to see how the first crop of deals pan out – that sets the tone of the market, rightly or wrongly, but CLO demand is so strong that tail risks might be all but ignored.”

This concern was echoed by four more buysiders. “It’s good to have the gears turning again, but my concern is that there was already some CLO oversupply before the crisis and now every deal is going to be dogpiled,” a third buysider said. “If there’s still so much demand out there, are margins even going to have reacted to the conflict?”

“This year is an open question. I would like to say I expect credit committees to be cautious until they see just what the market can digest in the next few weeks, but I’m not sure that will be the case,” added the second buysider. “My concern is that things will quickly snap back to previous rates – not the crazy, 350 and two margin ratchets we had last year, but to where things were in January.”

Single B margins have been on a general uplift since the beginning of 2021, only exacerbated by Q1’s market shutdown. Overall, Single B loans issued at an average of 424 bps in Q1 2022 (versus 380 bps in Q1 2020) with an average OID of 99.16, according to 9fin data. This rose sharply through-out the quarter, ending at an average of 475 bps in March after the year’s start of 402 bps in January.

Two B2 names that recently closed fit the pattern, coming in at E+450 bps / 98.5 (Cupa) and E+475 bps / 99 (Clinigen). Triton’s around £1.5bn take-private of UK pharma group Clinigen was already fully covered in pre-sounding, according to sources close to the deal.

Equally, a widening of CLO liabilities has occurred throughout the quarter, from high-90s in December 2021 to average AAA spreads of 118 bps at the end of March, according to Barclays. Junior tranches were particularly weak, widening the CLO funding arbitrage, meaning that single-B deals may struggle to break the 400 bps barrier in the short-term.

Despite a month-long shut down, CLOs nonetheless printed a 25% increase YoY of new euro issuance to €9.8bn, while refis fell to €8.5bn (-80%) and resets to €11.2bn (-62%).

“The demand is so strong from the CLO side that most stuff will be able to get done,” said a fourth buysider. “There’s a lot of ramping up happening at the moment, so that technical is moving quickly.”

Buy and sellside alike predict a booming Q2 in leveraged loan issuance – matching an increase in underwriting activity – despite a fall off in opportunistic offerings, as delayed deals make their way through the market and banks look to clear out their backlog ahead of summer.

Two sellside sources describe the pipeline as “robust”, with one to three deals in marketing phase “at any given time”, and mid-sized deals from mid-tier credits coming alongside the jumbo LBO deals long discussed. One bank underwrote four deals during the pause in primary, where they “got better terms, fairer terms, than we had been getting”.

The banker went on: “Now, the competitive environment has returned to the same level as pre-invasion. There was only a very short period of differentiated terms available. The competition is surprising, given some banks are sitting on stuff that is underwater, it is very active.”

Four buysiders highlighted that some of the large, long-expected pipeline deals are exposed to sectors they are backing away from out of inflation caution: Morrisons, for example, as well as Boots and Unilever Tea. “Banks need to have very, very good answers for how these companies will deal with inflationary pressures,” said a fifth buysider.

“Underwriters at this stage really need to go and think about what the market is willing to stomach right now, with all these concerns right at the front of our minds, before they start taking more and more deals onto their books,” said the fourth buysider.

With that, parsing through Q1 numbers for these companies looking to come to market, and their ability to manage inflationary woes, have been “the big question” from prospective lenders, a second banker said. “Q4 earnings haven’t been as important to lenders as Q1 numbers, because that’s when the pain will really start to show.”

Most investor concerns centred on Leisure, Retail, Consumer Discretionary and Auto names – the latter potentially impacted by new lockdown measures in China, as well as metal supplies (such as titanium and steel) from Russia. “There’s been a consensus that pent up demand here would mean a huge bounce back in 2022, but that’s now up in the air,” said a sixth buysider, adding this could complicate things for Fauceria’s expected dual-currency loan supporting its acquisition of Hella.

With this growing cautiousness, both sides expect economic terms on deals (particularly ticking fees and what one buysider dubbed “comedy ratchets”) to be the centre of some “emotional conversations” on docs, as the second banker put it.

Far from the booming quarter buysiders had predicted at the end of 2021, buysiders instead describe a bifurcated quarter: the first half, “battering down the hatches” on the expectation of spiralling inflation, as one put it, the second, digesting the impacts of the Russian invasion.

Unsurprisingly, with the market ground to halt from mid-February onwards, euro-denominated leveraged loan issuance more than halved (-57%) YoY to €38.6bn in the quarter, dominated by acquisition financing instead of the recaps buysiders had expected following blockbuster years from sectors including Building Materials and Healthcare.

Overall, however, buysiders described the loan market as relatively insulated from the conflict in Ukraine, suffering a muted blow compared to HY, where issuance was down 60% YoY in the quarter, and “materially underperformed” loans in secondary, as lenders and bankers alike describe it. Even without the Ukraine blow, HY issuances was, as expected, below that of loans, as lenders pivoted to floating rate product in a rising interest rate environment.

“There’s a lot of spillover anxiety at the moment,” said a seventh buysider, “but if you’re ramping up after the closure, you’re hungry too. There’s a window for some real opportunism from the sponsors, especially if they keep coming with more defensive names.”

The primary that slowly ebbed back in Europe came defensively. Some issuers turned to dollar-led structures to get their deals through, with USD volumes issued by European companies increasing to just under half (49%) in the quarter.

The final weeks of the quarter also saw issuance trickle back through fungible add-ons. The proportion of fungible add-ons issued to overall issuance is not, however, notably higher than previous quarters over the past two years – issuance tends to align with Covid-19 restrictions and uncertainty.

Meanwhile, in primary’s absence, investors unsurprisingly spent the latter half of Q1 topping up on names they favoured “at prices better than we’d had in a year”, as the sixth buysider put it, though they frequently struggled to execute trades given a quarter-long widening in bid-ask prices.

“How much liquidity is there actually in secondary trading?” asked an eighth buysider. “How much are people actually willing to sell out at a deep discount when they are par pieces of paper? You’d really have to be a forced seller.”

Overall, the secondary loan market fell -1.5 points between 1 January and 1 April 2022, according to 9fin data, with the most impacted sectors being Consumer Staples, Consumer Discretionary and Materials. Splitting out further, only Hotels, Resorts & Cruise Lines remained buoyant, dragged up by +4.9 point increases in Vacalians and a price recovery from Hotelbeds.

“It’s another thing pushing us towards primary — things are shaking out there, it’s getting healthier, but we’re still not going to be able to get the amount in secondary that we can get in an allocation on a primary deal,” said the fifth buysider.

Leveraged loans - Inflation to split issuers in Q2 boom after muted Q1

Read all our public content for free

Recently Published

European Private Credit Q1 2024 Review

Video interview — Alan Schrager, Oak Hill Advisors — Private credit’s hopes and fears

European leveraged loans Q1 24 — A blooming market

The Stress Release — April 2024

What are you waiting for?

Cookies & Privacy