Market Wrap

LevFin Wrap - A cold wind blows

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

High Yield Primary

The loan market may continue to rumble on, but High Yield Primary has all but juddered to a halt – waiting for developments in Ukraine and assessing continued market volatility. 

Outside of mainstream European primary, we have however seen some action in the Scandi markets. Finnish building systems group Caverion priced a small, unrated RegS €75m 2.75% SUN due 2027 (99.425 OID) to fund GCP and a partial repayment of existing notes. And across the border, Sweden-based renewable energy group Arise mandated a €50m (max) four year green FRN, with investor meetings starting today. Green proceeds include those for renewable energy investments to promote low carbon solutions, and ‘climate-resilient development’ – Cicero Shades of Green has awarded the framework a dark shade of green.

Turning back to last week – unimpressed by the market rates offered, debt investor Anacap pulled a 2027 €350m FRN (PT E+675 bps, 98 OID) which would have refinanced its notably cheaper E+500 FRNs due 2024. Also citing market conditions, State Oil Ltd, parent of Prax Group decided against proceeding with its debut $250m SSNs

In contrast to these refi’s – which can be flexible on market timing – the financing for Covis Pharma was underwritten, leaving little room to manoeuvre for the challenging credit. After a lot of shuffling, final terms emerged this Monday, with the package set at $595m TLB S+CSA+650 bps€310m TLB E+650 bps, and a $312m 2nd Lien at S+CSA+975 bps. Both 1st Liens are offered with a 90 OID – a discount we’ve not seen since the second syndication of Advent’s Roehm buyout in early 2020.

As spreads retrace to about the levels seen at the end of 2020, we’ve now tracked three bond deals pulled in the first six-weeks of 2022 (four if you include Covis, although technically this was flipped into the loans), the highest in any quarter since 2018.  

Leveraged Loans Primary

Another quiet week in leveraged loan land as issuers remain spooked on interest rate rumbles, inflation anxieties and wider geopolitical tensions — a sentiment shared by lenders. “We have a warehouse and we could ramp up if we wanted to, but we’re holding off,” said one buysider. 

This week, just €2.1bn of euro-denominated deals priced versus €3.2bn the week prior, according to 9fin data. “The pipeline is still coming, but people want to hold off for a moment to see if things can settle,” said a second buysider. “They want someone else to test the waters, so there are a lot of deals waiting in the wings at the moment.”

“There is stuff being pre-marketed, but not a lot,” said the first buysider, naming increasingly difficult price discovery as a key issue. “CLO issuance market is grinding to a halt at the moment, we need to know where the liabilities are to see what loan pricing works for us.”

“The market is moving week by week, deals will launch and will be pricing into a different market, they’ll already be just a bit out of step with investors,” said a third buysider. “This can mean a pretty attractive pricing move for us.” A fourth countered: “It can also mean deals are closing tighter than they warrant.”

Around half of this week’s total comes from Spanish ceramic coatings manufacturer Altadia. Its €1.2bn deal, backing a buyout by Carlyle, ultimately conceded both docs and pricing to get over the line. The company reverse flexed the margin by 25 bps to E+475 bps and conceded one point on its OID to 98.5. See full docs changes here.

“I’m not surprised by these changes,” said a fifth buysider. “They misjudged pricing by a large margin when they went out and the secondary market has weakened since they announced the deal. Previously, we thought the pricing just wasn’t attractive at all and that the docs in current market conditions were frankly silly.”

Cerba serves a ratchet racket

Another deal, from market familiar lab firm Cerba, also struggled to make it past the post, downsizing its Term Loan C by €50m to €600m and sweetening the OID to 99 from 99.5 guidance. Proceeds back the acquisitions of Labexa GroupViroclinics and Project Milk.

How quickly margin ratchets would kick in were central to buyside concerns on this deal. Marketed docs had no requirement for the company to normalise EBITDA from the non-recurring or recurring effects of COVID-19 when calculating leverage for ratchet leverage tests, according to buysiders. There was a 25% of EBITDA cap on adjustment for cost savings and synergies, however no third party due diligence was required. 

Given the presence of the ratchet, and using actual EBITDA (including pro forma acquisition), buyside expected to be two ratchets down to E+350 bps when tested at six months, with H1 2022 likely to benefit from further PCR testing revenues. The buyside put actual LTM EBITDA at between €800m and €900m including acquisitions. 

In the end, Cerba extended the margin ratchet holiday to 12 months to assuage some of these concerns, according to two buysiders, however they were not surprised the deal needed to sweeten OID and shrink in order to close.

“Investors definitely did not really like the ratchet margins amid a weak market,” said a sixth buysider. A lot of investors pushed back, saying: “why bother to invest in it if they can easily buy something of a similar business/rating profile at the same price [likely without aggressive ratchets]?” 

Back of the (Veo)net

An open goal for Veonet, the sole euro-denominated loan launched this week. The ophthalmological (eye) clinic network is seeking to blind buysiders with its euro/sterling split €795m TLB, which, along with €170m second lien notes, backs an LBO by Ontario Teachers’ Pension Plan and PAI Partners

Handing out B2/B ratings, agencies flagged its leading position in Germany, the UK and Switzerland, supportive underlying drivers such as ageing populations, increasingly outsourced healthcare and the necessary nature of many of its procedures.

Not the Median

Closing off a previous saga, rehabilitation clinic group Median priced a £250m TLB to back its acquisition by Waterland and refi both its and Priory Group’s capital structure. This sterling slice was postponed back in November 2021, almost a month after the initial commitment deadline of 7 October, when the €500m euro portion of its offering came in at E+500 bps and 97 OID from guidance of E+475-500 bps and 99 OID.

During delayed syndication buysiders asked for a premium after ITV aired an undercover documentary on The Priory Group, depicting convicted sex offenders housed at Priory’s Kneesworth House Hospital, showing some patients being able to access the internet, including dating and explicit websites.

High Yield Secondary

Despite the broader wobbles afoot, Secondary instruments this week traded down just -0.15 pts on average (38% +0.38 pts | 59% -0.49 pts). By Industry, Financials (-0.27 pts) and Materials (-0.25 pts) fared worst, while Real Estate (-0.07 pts) and Energy (unmoved) proved more resilient. Year-to-date, Healthcare (-4.67 pts) and Communication Services (-4.28 pts) have seen the largest losses.

As reported, O&G drilling and service provider Saipem SUNs sold down in late January following a press release which withdrew its FY 21 outlook and projected substantial losses. The notes recovered ~3 pts on average this week, following reports of a bridge loan on the 10th February, and more recently that a €4bn restructuring package was being put together – including a €2bn capital increase, a €1bn credit facility, and a potential drilling division offload which could net €1bn in proceeds. Read our Stressed QuickTake for more.

In Real Estate, the main news of the week surrounded Aggregate Holdings, shareholder in Adler Group, who announced they will distribute findings from a 9th February Hogan Lovells review commissioned to counter Viceroy Researches allegations. As outlined by Bloomberg, the report is available to banks and investors willing to sign an NDA. The 6.875% 2025s were seen today at 61.2, and the 5.50% 2024s at 69.0.

Following Anacap’s postponed SSFRN offering, the existing 2024s traded down to 96.5 (from 98.7 pre new-deal), with Moody’s downgrading the secured debt rating to B3 on Friday.

Similarly, financial data business ION Analytics saw its existing bonds slide after an unsuccessful deal launched on 25th January – the 2028 SUNs have dropped -2.5 pts to 94.8.

Across wider metrics, sentiment continues to soften. The iTraxx Crossover widened out again, up around ~20 pts on the week to 331 pts this morning. And in fund flows, Bank of America Global/EPRA Research reports outflows for Global- (-$352m), US- (-$504m), and in particular Euro-focused funds, which saw jumbo -$1,174m outflows. HY Funds have lost -2.8% AUM YTD, the worst start to a year since 2018.

Leveraged Loans Secondary

Some buysiders are favourably comparing opportunities in secondary against the volatility of primary this week, with general trade down across credits opening up opportunities that have, in recent months, been scarce, according to buysiders. This has shaped some minds on primary loans including Altadia, where two investors admitted flashy plays in secondary soured them on the deal.

“Secondary is where our attention is now,” said a seventh buysider. “There’s a big wave of CLO warehouses looking for paper and primary can’t take it in.”

Others were less sanguine. “Secondary is attractive at the headline level, but the bid-ask spread makes it difficult to execute,” said the first buysider. “Along with that, there is not a lot of liquidity in secondary because some people are cautious about taking risk on their balance sheet and some people are just holding on. It’s hard to execute.”

Across the board, industries tracked by 9fin saw larger than usual average weekly pricing slides, led by Materials at -0.6 pts and then Healthcare at -0.5 pts. The highest individual name rise came in at just +1.1 pts from Cineworld, hopping to 78 on its €607.7m E+262.5 bps 2025 TLB. Cineworld announced today it had agreed to delay $79.3m in payments to former shareholders of its US chain Regal.

Hastening Materials overall fall, packaging firm Schur Flexibles lapped other downward movements, dropping -24.5 pts to 75.9 on its €475m E+425 bps 2028 TLB this week, though rebounded from lows of 67.5 on Wednesday. Management was dismissed following the discovery of compliance breaches including allegations of accounting irregularities. Lead bank JPMorgan held a call for lenders on Wednesday, whose main purpose was to convince them to get organised ahead of a video conference call update from the Austrian packaging firm on 24 February. Read more here.

In Healthcare, Australia-based heart disease and cancer clinic network GenesisCare fell -6.3 pts to 89.3 on its €500m E+475 bps 2027 TLB this week. More broadly, French care homes have attracted scrutiny following the publication of Victor Casanet’s book Les Fossoyeurs, which focuses on Europe’s largest for-profit care home Orpea, with the allegations range from negligence to criminality. A 9fin report on this will follow.


LevFin Wrap is published weekly for subscribers and includes our Forward Pipeline. If you would like a sample of our Forward Pipeline or Deal Predictions, please complete your details here.

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