High Yield Primary

Despite taking a small breather on Tuesday, High Yield markets continue to trade poorly, spooked by growth and inflationary fears. More broadly, the S&P is on track for its worst run since 2001, UK CPI inflation hit a 40-year high of 9% in April, and the iTraxx Crossover is back up at 478 bps, after dipping to 442 bps on Tuesday’s close.

New supply remains muted while markets navigate ongoing headwinds, with even the technical CLO bid failing to support one weaker loan name, pulled this week. However, demand is there for stronger credits, as proved by French cleaning service group Elis (Ba2/BB+).

Offering €300m Senior Notes due 2027 under its EMTN programme, IPTs in the 4.875% area pared back on guidance to 4.375-4.50%, and then again on final terms to give a 4.25% yield (4.125% coupon and 99.447 OID). While you might expect more-than-usually inflated orders, books were still more than 10x oversubscribed, with €3.2bn+ at the tight end of guidance. Performance since pricing has held firm, with the notes last seen today at 100.1-mid.

Debt buybacks up for debate

9fin’s US readers will have seen our recent coverage on potential buybacks. For companies with discounted debt and spare liquidity, open market purchases could provide a chance to reduce interest costs and leverage going forward. We replicated the screener results for European names, which subscribers can see, and tweak, here.

In theory, companies who pursue this trade could resell the debt back into the open market at a later stage, and hopefully higher prices – but most simply retire the debt, reports William Hoffman. PE-backed firms could also see the sponsor buy the debt, either holding it to maturity or again reselling in the market at a profit. However, some question the wisdom of using cash to buy back debt at a time when interest rates are rising, and economic conditions worsen:

“Companies typically want to conserve cash as the economy gets tougher,” a LevFin banker said. “So while many may discuss bond buybacks, fewer CFOs are willing to do it than you might think.”

Also there are constraints on instrument liquidity (i.e. the ability to actually purchase the debt at current levels) and the evident point that with rising rates, any companies needing to issue new debt in the immediate future are likely to pay much higher margins – even after accounting for the interest savings made on any retired debt, and the improved credit metrics.

For reference, the average single-B, secured EUR instrument issued in 2021 was offered with a 4.65% coupon, and is now yielding 7.40%.

High Yield Secondary

Instruments were down a further -0.52 pts on average this week (22% +0.61 pts | 76% -0.86 pts), with Energy the only Sector marking positive gains (+0.11 pts). Consumer Staples (-0.54 pts), IT (-0.61 pts), Consumer Discretionary (-0.83 pts) and especially Real Estate (-1.97 pts) saw large losses. There were plenty of big single-name moves too, including 80 tranches with losses of more than -2 pts.

French care home operator Orpea tumbled -10 pts this week on reports of ‘a certain number of fraudulent activities’. The report links to the Swiss unit Kauforg, where France Info suggests excessive invoices were charged to suppliers for services. The news comes just days after Orpea disclosed it had reached an ‘agreement in principle’ with banks to provide a €1.733bn syndicated credit facility.

CMA CGM and Air France-KLM announced a long-term strategic partnership, which will include the joint selling of their air freight capacity, and the purchase of up to 9% of Air France-KLM’s share capital. On Friday, the airline also entered into exclusive discussions with Apollo, for a €500m capital injection into an operating affiliate of the group. Proceeds would enable the group to partially redeem French state perp bonds, and fund future spare engine acquisitions under the fleet’s renewal program. The 2024 and 2026 SUNs are up +0.7 pts and +2.5 pts respectively.

As covered in the Friday Workout, Frigoglass confirmed engagement with advisors Milbank and PWP to advise on further liquidity needs in response to upcoming maturities and a working capital build-up – the 2025 SSNs are down -7.8 pts this week. Consolis, which manufactures pre-cast concrete modules for building, also reports a cash squeeze, drawing €55m on its RCF as it battles inflation and time lags in indexation clauses for new contracts – the 2026 SSNs are down -5.8 pts this week. And finally, more news across the Adler complex, as chairman Stefan Kirsten held a conference call to outline governance changes at the embattled real estate group. Negative equity at the Consus subsidiary will require an intercompany loan to fix, and KPMG confirmed they will not be auditing Adler’s 2022 statements – the SUNs have lost an average of -6.7 pts since the call.

Elsewhere, DIY retailer Maxeda posted tough Q4 earnings, as EBITDA dropped -51.3% YoY, and leverage increased +0.2x to 3.7x. The group’s 2026 SSNs have dropped around -9 pts on the week, currently seen at 79.7.

There were also notable slides across other retailers, including: Douglas (-3.1 pts, average across SSNs and SUN PIKs), BUT (-6.8 pts), HSE24 (-4.6 pts), Very Group (-3.9 pts), and THOM Europe (-2.8 pts).

Some positive news for French facilities manager Atalian however, as light was shed on a long awaited equity raise. Sky News reports CD&R is in talks to purchase large stakes in Atalian Servest and OCS, with hopes to create a “global powerhouse in facilities management”. The article cites the combined deal could be valued at ~£2.5bn, and that an agreement may be reached with one or both companies in the next few weeks. The group's 2024 and 2025 Senior Notes jumped around +8 pts on the news, now seen in the high 80s.

Leveraged Loans Primary

The week’s one spot of activity in European primary was, alas, snuffed out. Sweden-based B2B distributor OptiGroup (B2/B) postponed a €515m TLB after a cold reception from lenders, despite “CCC-level” pricing and “2015-style” docs. More below.

Some squirmings in the pipeline persist. As reported, sponsor Groupe Bruxelles Lambert (GBL) has mandated KKR Capital Markets as a lead arranger and joint physical bookrunner for its buyout of Netherlands-based diagnostics provider Affidea (B2/B+). Nonetheless, timing for the deal is unclear given the difficult nature of the market, according to sources.

Elsewhere, Rodenstock (B3/B-/B-) will also return to the market for a €170m add-on to its €660m 2028 TLB to support the acquisition of Spanish peer Indo Optical. The Apax Partners-owned, the German lens and eyewear producer had to extend the deadline on its buyout financing in May last year, with some lenders unclear on the investment case given the company’s small size and historic troubles. Read a preview of that deal here.

Sub-OptiGroup

OptiGroup’s postponement – “I’ll give you a tenner if this one ever comes back,” pledged one source – leaves the European leveraged loan market high and dry. Books were close to being full, according to buyside sources, after a generous 94 OID widening even further prior to being pulled.

The company cites adverse market conditions, buyside sources said, and there is likely some truth to that. Investors describe themselves as “overwhelmed” by news stories portenting doom, skittish as recessionary fears, geopolitical tensions, supple chain knots and inflationary pressures hang like the sword of Damocles above their portfolios.

“It reminds me of the Keter deal – when will the market be more palatable to these issuers?” asked a second buysider, who speculated the deal could go to the private credit market instead.

“The difference is that in primary you can get the kind of allocations you’re still struggling to find in trading, but price-wise, there’s a lot that’s a lot more attractive out there in secondary,” said a third buysider. Other Consumer Discretionary names are down to 94 points on average, putting them in line with OptiGroup’s initial offering, according to 9fin data.

Nonetheless, analysts looking on the deal were also disquieted by an unfamiliar sponsor in Nordic mid-market PE firm FSN Capital, paper-thin organic growth and a vulnerable position as a middle man exposed to ‘Amazon-risk’. “There’s no particular point that is a red flag, but when you add it all up, it starts painting a picture that I don’t like,” said a fourth buysider. Read a full preview of the deal here.

Leveraged Loans Secondary

Markets remained choppy, keeping on track for four weeks of across the board consecutive sector declines. The slides are more substantial, as well, with every sector tracked by 9fin down at least -0.5 points.

This week, Financials led the pack at -1.1 points, led by Isle of Man-based online payments processor Paysafe, whose instruments fell -3.6 points week on week. The company reported a 8% YoY slip in EBITDA last week, with leverage up a full turn to 5.6x, after recognising a $1.2bn impairment of goodwill in the quarter “due to a sustained decline in Paysafe’s stock price and market capitalization”.

The biggest fall, however, came from Arvos Group, a supplier of heaters for thermal power plants, whose loans plummeted 79.8 last Friday to 68.5 on Monday.

Meanwhile, printing paper manufacturer Lecta’s slim €75m 2023 TLB was the week’s winner, up six points following a Q1 results presentation last week touting a 17% growth in sales.

The week also contained another update from Schur Flexibles, down four points this time on its loans. The company issued its revised financing proposal to lenders, broadly based on a CoCom proposal submitted by Apollo, the largest lender, according to sources. Up to 25% of the SFA debt will be reinstated and up to 35% for the supplier credit facility (SCF). The reinstated debt will receive 45% of the economic upside, with the remainder (55%) going to the providers of the €150m new money facility, of which €60m will be available as an interim facility to be drawn from 6 June, and the remainder to be funded at closing. Read more here.

More pain. With leverage in the double digits after a Covid blow to diagnostics, GenesisCare has told lenders that a A$100m capital increase and the divestment of its cardiovascular business are going ahead according to plan and will be finalised by the end of June, according to two buysiders. More here.

Elsewhere, a familiar name in this section of the Wrap, health retailer Holland & Barrett reported sickly results last week. The company coughed out net leverage of 8.3x for March 2022 last Friday, up from 5.9x the year prior. EBITDA also declined 25% YoY as part of a roughly nine month consecutive decline, despite sales being up 3.9%.

With leverage climbing, lenders expect Holland & Barrett will be in breach of a 8.5x leverage covenant on its RCF, which is now fully drawn, by Q3 2022.

These results come amid growing unease among the lender base over sponsor LetterOne’s Russian ownership (LetterOne stresses that the company itself is not sanctioned, although now departed board members are), following on from an April letter from advisors Latham & Watkins with majority lender backing requesting an updated business plan and more regular communication – this request was rejected.

Some positive sentiment remains for the company, however, with some distressed fund sources saying they believe the sponsor remains supportive and the loan pricing will rebound. Other lenders are sceptical on how strong LetterOne’s commitment to European investment may be given sanctions. Read more here.