LevFin Wrap - A challenging backdrop, but sentiment improves

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Market Wrap

LevFin Wrap - A challenging backdrop, but sentiment improves

Huw Simpson's avatar
Laura Thompson's avatar
  1. Huw Simpson
  2. +Laura Thompson
8 min read

With some new deal flow rumbling through US HY, and a privately placed €480m TLB landing for veterinary group IVC Evidensia, thoughts may start turning to when European HY will reopen.

Sentiment has improved with the iTraxx Crossover closing at 334 bps on Thursday – around 50 bps tighter than last Friday. And in a first for 2022, average prices in Secondary registered a gain on the week, up +0.32 pts (64% +0.79 pts | 34% -0.55 pts).

But, the macro outlook remains bleak – and both the Fed and BoE confirmed expectations this week, raising rates a quarter of a point in the face of rising inflation and supply chain constraints. Across fund-flows we’ve seen another week of large outflows (as reported by BofA Research), particularly for Global High Yield (-$1,097m). Although smaller than last week, US (-$479m) and Euro-focused (-$571m) funds still show significant outflows.

Secondary Moves

Several single-names have managed to retrace losses seen in recent weeks – while across industries, Healthcare made the largest gains (+0.85 pts), followed by Real Estate (+0.37 pts), Energy (+0.36 pts), Materials (+0.36 pts) and Consumer Discretionary (+0.35 pts). At the lower end, IT (+0.07 pts) and Financials (-0.03 pts) were broadly flat.

Gains were seen across Healthcare instruments (80% were up on the week), in particular BioGroup LCDGruenthalStada and Teva who all gained +1 to +2.5 pts, the latter despite the start of a multibillion-dollar opioid crisis trial.

The largest move in the Energy sector came from Italian-headquartered O&G firm Saipem, which traded up an average of +3 pts across its SUNs. On Monday the group released an update on its new ‘2022-2025 strategic plan’ – although the board approval meeting has now been postponed to the 24th March. Saipem also reports it has been awarded a new offshore drilling contract by Aker BP, worth $325m.

Saipem: 2022-2028 Senior Notes performance

Last week, paper producer Pro-Gest saw its 2024 SUNs tumble more than -20 pts on news that it was halting production at six of its Italian mills, due to high natural gas prices. Trade magazine EUWID reports production has now resumed at (most of) its mills, where new customer agreements allow for higher cost pass-throughs – the 2024 SUNs recovered over +8 pts this week to ~76. Also highlighting increased cost pass-throughs, fellow paper producer Lecta announced on Monday a €150 €/t energy surcharge on all paper grades for orders from April 1st.

However, this week’s largest single-name move came from Swiss direct-selling beauty group Oriflame. The company’s fixed and floating notes are back into the low 80s, after dropping to the high 60s last week on fears of exposure to the CIS region – which generated 28% of group turnover for 2021.

Headwinds for Aviation

As reported, recent events have “crippled” the Aviation sector, grounding aircraft out of reach, restricting access to air space and creating supply chain pressures for spare parts. Recent EU sanctions now prohibit the sale, transfer, supply or export of aircraft and components. Russia responded with measures to allow carriers to re-register foreign aircraft in Russia (contrary to international laws) – something one 9fin source compared to “state-sanctioned piracy”.

At Thursday’s close Brent Oil was ~$109/bbl, having briefly dipped below $100/bbl earlier in the week. Rising oil prices are closely linked to the cost of jet fuel – which now sits at a 14-year high according to Reuters. The issue is made worse by the reduction of hedging across many European airlines – reportedly around two thirds of expected fuel consumption for the next 12 months is hedged. As another aviation source explained: “a lot of airlines got hedging wrong in 2020 and ended up overpaying for fuel, so many decided to step back, particularly in the US”. Meanwhile, and at least for the short term, flight times (and therefore fuel-use) are increasing for many European airlines, who now have to avoid Russian-Ukraine airspace.

To combat this, Portuguese flag-carrier TAP Air is attempting to pass these higher prices through to customers, announcing an increase in the YQ (fuel tax) charge on Thursday.

Commodity markets also continue to churn. Following the refinancing of its $5.3bn European RCF, oil and metal trading group Trafigura raised a nine-month $1.2bn liquidity facility in early March, amid growing market volatility – the company expects to increase the facility to more than $2bn. Bloomberg reported the group has been in talks with PE firms to secure additional financing, as higher prices increase margin requirements (and presumably the potential for greater trading profits). The 2026 SUNs were last seen at 84.4, slipping just under -3 pts on the week.

In other news

  • Former memestock sensation, now activist conglomerate, AMC Entertainment this week purchased a 22% stake in a Nevada gold mine. CEO Adam Aron praised its “rock-solid assets”
  • Travel group TUI AG has initiated an investigation into its shareholder ownership, after it was informed that the majority of a stake previously held by sanctioned oligarch Alexei Mordashov was transferred to an entity controlled by Marina Mordashova, his wife
  • More on Renault – the carmaker will shut down two French plants as it faces semiconductor chip and parts shortages. The Financial Times also reports on the current situation

Leveraged Loans Primary

Crickets. Loan issuance remains absent under the shadow of the Ukrainian war, with issuers staying shy and market volatility unabated. Four buysiders speculate that issuance could return by as late as mid-April – another month away – although underwriting remains strong, according to sellside sources.

“A lot is happening and nothing is happening at the same time,” said one buysider. “It’s still a wait and watch scenario, generally the loan market is isolated from direct exposure to the conflict, but no issuer wants to be the first to test the market.”

“It would have to be a very solid name at this point, one that brushes up against IG in a solid sector like Telecoms,” said a second buysider.

The current pipeline does not immediately offer such options. The continued flirtation of Morrisons with the market, for example, is leaving buysiders unsure on whether to commit, with questions on whether this new market could take such a hefty sterling bite.

“We’re reducing sterling positions where we can as part of a broader de-risking strategy,” said a third buysider. “There’s a question mark about how much sterling the market can swallow, especially now, with Boots also in the pipeline. It’s something that was being asked before, but now it’s really a potential roadblock.”

Another name in the pipeline, auto equipment supplier Faurecia, could be delayed given its access to bridge facilities, as well as raw material constraints – around inputs including neon gas, palladium, steel and titanium – putting the auto sector more widely on the back foot. “It would be surprising to see them come to market soon when they have the flexibility to wait,” said a fourth buysider. “If you don’t have to come, why would you? You could be paying as much as 150 bps wider than three weeks ago.”

One sign of life this week came from British veterinary group IVC, which privately placed a €480m 2026 TLB (B/B+) at E+475 bps. The company was last in the market in October 2021, when it closed 75 bps tighter at E+400 bps. For comparison, S&P B-rated deals priced at an average of E+450 bps in February and E+375 bps in January.

Leveraged Loans Secondary

Buysiders continue to struggle to execute secondary trades, describing an illiquid market with few sellers and “often irreconcilable” bid-ask spreads, as a fifth investor put it. One small pocket of activity has been loan-to-bond switches on the same name, usually just for small trades of around €3m, according to three buysiders, as they keep an eye on bond limits in their CLOs. Investors have named credits including NobianPaysafeDouglas and Polynt here.

Stepping back, we’ve seen a divergence across broad sector pricing movements this week, compared to the blanket drops in previous weeks – though these movements remain small.

Unsurprisingly, rising raw material costs form the basis of most credit concerns this week, like the last, and are likely behind the continued decline in Materials and Consumer Staples.

As such, in this week’s individual movers, food companies such as CSM IngredientsLabeyrieNomad Foods and Euro Ethnic Foods dominated, as supply issues tied to Ukraine and Russia’s dominant role in wheat and grain production increased.

“The questions I’m asking across my portfolio are: what can consumers cut? And what can companies pass on?” said one food and retail analyst this week. “Here, these are often non-essential goods, but if there is a cheaper competitor or the company isn’t large enough to negotiate with supermarkets, then that’s the kind of red flag I’m looking for.”

Dough-based food producer Cerelia fell the furthest this week, down -4.2 pts to 91.8 on its €382.5m 2027 TLB, likely on rising wheat costs, and following an outlook downgrade to stable from Moody’s. The agency does not expect Cerelia to maintain leverage below 6x, citing a decline in 2021 results after 2020 lockdowns boosted spending for at-home food products, as well as time lags in passing through rising raw material costs.

Upfield (Flora), however, was a top recoverer this week, despite being vulnerable to the same raw materials constraints, Ukraine being a major exporter of sunflower oil.

“I know it’s a divisive name, but I am very constructive on it,” said a seventh buysider. “The concern is cost inflation on the oils they use, but Flora have the dominant market share and are able to negotiate well with the supermarkets. They are still implementing price increases for last year's impacts, so the question is what more price increases will be required?” Its €2bn 2025 TLB and €375m add-on rebounded +1.3 pts this week to 92.6, while its PLN2.089bn 2025 TLB is currently at 85.4 after clawing back +1.9 pts this week.

It is joined at the top of the league table by other names, such as Stada, which were initially hit hard by the conflict, and now continue a shaky recovery:

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