LevFin Wrap - Commodity crunch unsettles secondary
- Huw Simpson
- +Michal Skypala
With Primary now shut for a little over a month, fallout from the ongoing conflict in Ukraine continues to build on existing concerns for European issuers. Increasing input costs and supply constraints are now the key drivers of many large secondary moves.
The iTraxx Crossover continued the upwards march we’ve seen over the past two weeks, reaching above 400 bps early this week before tightening -35 bps on Wednesday, and closing out Thursday at 387 bps. The sharp reversal mid-week came about after a late surprise emerged from the ECB.
Christine Lagarde announced on Thursday that the central bank expects to decrease bond purchases through the APP, with an aim to end the programme in the third quarter of 2022 – although any adjustments to interest rates will be “some time” after. Given the second order knock-on effects to supply and production from the conflict in Ukraine, it appears the ECB is targeting inflation rather than growth.
Other macro news emerged from the US Bureau of Labour Statistics, who reported February US CPI growth of 7.9% (6.4% core) versus the previous year – a 40-year high – and this before many effects of the Ukraine war are priced in.
Across fund-flows, it’s been another week of sizeable outflows, as BofA Research report Global (-$859m), US (-$765m) and Euro-focused (-$769m) fund outflows.
High Yield Secondary
Prices dropped a weighty average of -1.02 pts, with around 90% of instruments tracking a loss on the week. Industrials (-1.04 pts), Utilities (-1.06 pts), IT (-1.21 pts), Consumer Discretionary (-1.32 pts) and Materials (-1.44 pts) all traded down markedly, with only Energy (-0.07 pts) relatively unmoved on the week.
Within Energy, O&G exploration and production firm Tullow announced H2 earnings on Wednesday, outlining growth plans amid rising oil prices – three new wells are planned at both the Jubilee and TEN fields. However, despite oil prices currently above $100 a barrel, increased hedging (a requirement of the May 2021 debt refinancing) limits some of the company’s upside, with an average ceiling of $78/bbl for 2022. The 2026 SSNs gained +2.8 pts on the week, and the 2025 SUNs +3.4 pts. Elsewhere, Raffinerie Heidie’s ‘non-deal’ investor update offered some tentative hope for existing holders of its 2022 SSNs, pulling the notes up +2.8 pts to the high 80s, as it outlined plans to contribute the Kalundborg refinery to the restricted group.
Of course, rising oil prices also have important knock-on effects for other industries. A key ingredient in plastics used for packaging, increased input costs have hit several names in secondary. Schoeller Allibert’s 2024 SSNs dropped -5.8 pts, Bormioli Pharma’s 2024 SS FRNs were down -3.7 pts, and Guala Closures saw its 2028 SSNs -2.4 pts.
Guala closed its Ukrainian Sumy production facility in late-February, and today (11 March) announced the introduction of a temporary surcharge – passing on a portion of the increased energy and raw material prices to customers.
On Friday, plastic packaging group Kloeckner Pentaplast released its preliminary Q4 trading update ahead of FY numbers on 01 April. With 2021 raw and non-raw material price inflation fully offset by the start of January 2022, Adjusted EBITDA is expected to land within 2% of the previous FY guidance of €235m – a figure already revised downward twice.
Energy prices have also forced two of Europe’s paper companies to halt production. Norske Skog CEO Sven Ombudstvedt initiated temporary downtime at the Austrian Bruck paper mill following ‘unsustainable’ energy prices. A planned new boiler should reduce energy consumption, but is not scheduled for start-up until April. The 2026 SS FRNs slipped -3.1 pts on the week to 100.5. On Monday, production also shut down at six of Pro-Gest’s Italian mills following further increases in natural gas prices. The group reports that prices “now more than 10 times higher than twelve months ago, have tripled in little more than a week”. Packaging plants will however remain in production for the time being. The €250m SUNs dropped around half a point on Tuesday, before plummeting over -21 pts on Friday to ~67.4 – now yielding almost 20%.
Operational exposure to Russia is also still driving large single-name moves, as seen with direct-selling beauty company Oriflame. Following an update on the Switzerland-based group’s operations, the 2026 SS FRNs fell -17 pts to the high 60s on Monday. Exports from Russia have ceased, with production re-distributed to other factories. The CIS region accounted for 28% of 2021 sales. Both the floating-euro tranche, and fixed-dollars have since recovered to the low 70s.
Last week, we mentioned Renault’s exposure as the majority owner of AvtoVAZ, which makes the Lada brand. The 2028 2.50% SUNs have traded off further this week, pushing yields up to 5.4%. Fitch released non-rating commentary on Tuesday outlining possible diminishing headroom under the issuer’s BB IDR.
And lastly, Is the nickel in a nickel worth more than the nickel itself? As reported by the FT, Tuesday’s three-month futures for the metal hit $100,000 a tonne following a huge short squeeze. At this price the nickel in a nickel would set you back around 12.5 cents.
Even before the surge, fears of possible future sanctions had pushed up prices, as Russia’s Nornickel (Norilsk Nickel) currently provides up to 70-80% of the refined product to Europe. French mining and metallurgy group ERAMET could stand to benefit however, with production facilities in New Caledonia and – since 2020 – Weda Bay in Indonesia. Slightly up on the week, the 2024 and 2025 SUNs were last seen today at 100.5 and 102.5.
Leveraged Loans Primary
This part of the Levfin Wrap is quickly becoming superfluous. Primary supply has been empty since mid-February, and with no resolution yet for the war in Ukraine, market volatility remains elevated.
Benign market conditions at the start of 2022 have been rapidly tested by supply chain disruptions, rising interest rates and inflation – especially in raw materials. The war has amplified supply chain struggles for those exposed to Russia or Ukraine, and spikes in grain and energy prices are affecting an even wider range of issuers.
Opinions vary as to how much of a liquidity squeeze the market is facing and for how long the primary break will last. On the trading screens, discounted names look like an opportunity, but execution is still lagging with bid and offer spreads often as wide as two points, according to two buysiders. The market has not moved from pricing discovery mode to find out where new issues could clear.
“I don’t think there is a liquidity crisis, there is just uncertainty which can last one, two weeks or a month, but investors have cash waiting and we don’t see massive [loan] fund outflows,” said a head syndicate banker.
M&A pipeline and LBO underwriting still remains active, just with additional scrutiny towards Russia-Ukraine exposure, and to rising energy prices which would directly impact cash flows, they add. That might tilt those affected issuers to accept more conservative terms and lower leverage. Nevertheless, a big shift in structuring is not expected.
“The market is still very competitive for underwriting. You should still put your best foot forward, and you can’t be too conservative otherwise you risk losing the mandate. Always go to the limit of what is accepted by the market,” said the banker.
Issuers that need funding while European primary is shut might find solace across the Atlantic, where primary markets have still been printing smoothly. European companies with a global footprint usually arbitrage based on which market has more favourable conditions, and can issue solely US dollar tranches to fund their immediate needs and already-signed acquisitions – especially if volatility in Europe persists.
A case in point is French automotive supplier Faurecia, who are hoping to fund the Hella takeover before April. Instead of a Dollar-Euro split, the company is looking to place just a sole Dollar tranche, said one buysider. Other high profile LBOs waiting on the sidelines, such as Unilever Tea could follow a similar example.
However, for issuers that have not tapped the US market before, the US dollar execution alternative might be a long shot. Syndication comes with currency risks and pricey swap agreements that banks might not be willing to provide. “US investors have plenty of deals to choose from, so a pure European deal coming to price there, unless it is a very good name, I am not sure it would get a warm reception,” concludes the banker.
Leveraged Loans secondary
Secondary prices continued their descent further down, with all sectors detracting, ranging from -0.16 pts to almost -0.60 pts.
Settling slightly versus last week, the biggest single-name decliners lost up to -4.5 pts:
German packaging firm Kloeckner Pentaplast’s 2026 TLB has been hit the hardest this week, falling a further -4.5 pts to 86.2, picking up slightly from a low of 83 seen on Monday. The company has been directly impacted by raw-material increases and its cash flows are now expected to be squeezed by rising oil prices which feed through into its resins and PVC inputs.
UK chain Vue Cinemas lost -3.4 pts across its €631m and €114m 2026 TLBs as news broke that the company has picked Lazard as financial- and White & Case as legal-advisors, reportedly for balance sheet optimisation. This came as a shock to at least a few lenders who are yet to receive an official explanation for the move. With no official lender call following the news, investors are scheduling one-on-ones with the company to get more information.
“From the January update, it felt as though they were performing well, even with the [film] industry switching to home releases. But picking advisors comes out of the blue,” said one buysider.
It is hard to tell if Vue is in acute need of more cash, or it could be super senior debt coming off call protection, and the company is exploring a need for a refinancing with pari passu debt in line with existing term loans, speculated the buysider.
French producer of wall coverings Tarkett has seen its loan attacking the 90 barrier, falling -4.1 pts to 90.2. The company is exposed to raw materials cost swings since its products are primarily vinyl and linoleum, therefore oil based material solutions. Historically, the company has successfully passed higher raw material costs onto its customers, albeit with a fairly long lag. Tarkett also has direct exposure to the Russian market, although this is of less concern to lenders.
“Russian exposure is limited to around 10% of revenue, but most of the production is self-contained in Russia. So, even if there are trade constraints they should be able to operate and sell those products in the country. It is worrying a bit, but we are just monitoring the name and waiting to see,” said the second buysider.
Higher input costs are also a concern for the construction sector. German building materials manufacturer Xella has seen its loan fall a further -2.1 pts this week to 95.6 – the 2028 TLB was seen at par in early February.
Ukraine is a big exporter of sunflower oil, and prices have been rising since the start of the invasion. It’s no surprise then that instruments for the Dutch margarine producer Upfield (Flora Group) have traded down. The GBP 2025 TLB lost another -1.7 pts this week, last seen on Friday at 90.3.
Although described as “muted” by several buysiders, secondary made room for a pair of BWICs due Wednesday – a €19m-equiv. (seven instruments) and a €95m-equiv. (45 instruments) which includes a mix of bonds and loans, across Euros, Sterling and Dollars.
The largest line in the €19m-equivalent list was a £4.67m piece of Advanced Computer Software’s Sterling 1st Lien. Four of the seven positions are sterling loans.
In the larger list, Huws Gray’s Sterling B1 TLB is the largest position, with £4.92m. A&O Hotels, IGM Resins, and McAfee (Euros) are among the other large lines.
If you enjoy LevFin Wrap, why not catch up on all the events in the market with the latest issue of Cloud 9fin. Each week the team bring you discuss and debate the events in the market with expert guests to bring additional colour.
This week’s podcast touches on some of the big issues resulting from the war in Ukraine. Could the ensuing inflation and subdued growth take down the whole market; can ESG channel its defining era when it forced South Africa’s apartheid to crumble; and where will the next deal come from?