LevFin Wrap - En Le-garde

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LevFin Wrap - En Le-garde

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  1. Huw Simpson
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High Yield Primary

Attention is once again on rates, as Thursday’s hawkish ECB prompted a sell-off in High Yield. Still, five deals made it through Primary, partly by offering extra yield—although ION Analytics pulled the deal it launched last week (the fourth time ION has pulled a deal) citing poor market conditions.

It emerged over the weekend that Covis Pharma’s refinancing package had also hit trouble, after a week with no update on initial IPTs (7.50% area on the $475m SSNs, and 7.00% area for the €-equiv. $375m SSNs). On Monday it was announced that the dollar tranche had been dropped in favour of a $300m Second Lien loan, and the euro tranche downsized to $350m (equiv.). To compensate, the $350m TLB is increasing to $550m, offered at S+CSA+650 | 93, from S+CSA+625 | 98-99. Adding to this, Bloomberg reported that the Barclays-led bank group was unable to shift the Second Lien (offered at S+CSA+975 bps) and may take it onto its own balance sheet.

New deal flow

Turning to this week's primary, debut issuer Fabbrica Italiana Sintetici (FIS) announced a €350m Senior Secured SLB to refinance existing debt and fund a small €40m dividend. Owned by the Ferrari family, FIS is a contract developer and manufacturer – and the largest CDMO in Italy. Although predominantly European focused (67% of LTM September 2021 revenues), the group intends to further expand into the US, either by acquisition or partnership.

The deal features a KPI redemption step-up mechanism similar to that seen in Itelyum’s September 2021 offering. While this doesn’t affect coupon payments, it increases the redemption price by 20 bps on a failure to meet each of three KPIs – clients can read more in our Legals QuickTake

Interestingly, the group launched the new bond while the contract with its main customer – which ends in 2024 – is still pending a renewal extension to 2029. Other considerations include a significant increase in raw material costs (+22% YoY, notably Rhodium) and pandemic-related difficulty in procuring some materials in 2020 and 2021, as Chinese producers shut down. However, Moody’s cites credit strengths including rising demand for health-related goods, continued outsourcing by pharma companies, and regulation creating high barriers to entry.

The deal was finalised at the tight end of PT in the 5.75% area, at final pricing of 5.625%.

Elsewhere, Worldwide Flight Services, the ground and cargo handling group, offered up €950m (equiv.) in Senior Secured fixed and floating notes, to refinance its capital structure and repay a €227m Bridge Facility taken out to fund the acquisition of Mercury Air Cargo. This, together with acquisitions of Pinnacle Logistics in September 2021 and CAS in 2016, has further improved the group’s position in North America – bringing its total number of airport stations to 93 at year-end. 

North America now generates around ~60% of revenue, up from 43% in 2018. The new financing reflects this, including a debut dollar $400m SSNs tranche alongside €340m SSNs and €250m SS FRNs. Pricing also tightened throughout the bookbuild, starting at IPTs of 8.00-8.25% / 6.75-7.00% / E+650a and landing at 7.875% / 6.375% / E+612.5 for par.

The group’s cargo handling segment has proved more resilient to pandemic-related restrictions, aided by strong e-commerce demand and a shift in freight transport from ocean to air. Cargo operations now make up 82% of LTM revenues for September 2021, an increase from 66% in September 2019.

Speeding through Primary, French equipment rental group Loxam on Monday announced €350m Senior Secured Notes due 2027, and managed to price next-day at 4.50% (par). Together with around €207m of cash on balance sheet, the deal will refinance the existing 2022 and 2023 Notes – pushing out maturities and reducing gross debt – and save ~€7.2m in interest costs. 

Some growth has been led by M&A, including expansion into the UK (2017: Lavendon Group), Italy (2018: Nove), Spain and Portugal (2017: Hune Group). In December 2019 Loxam acquired Ramirent, the Finnish equipment rental company for a reported €970m. Loxam-Ramirent compete with Renta Group, who last week priced €350m SS FRNs (flipped from fixed in bookrunning) at E+437.5 bps as part of IK Partners’ LBO from Intera Partners.

Renta’s SS FRNs have since dipped slightly below par – last seen at 99.6 – while French peer Kiloutou’s 2026 SSNs are currently trading at ~95, offering a 4.6% YtW.

Other deals

Across the Atlantic, meme-stock US cinema chain AMC Entertainment priced an upsized offering (from $500m) of $950m 7.50% Senior Secured Notes due 2029 (Caa1/B-). The deal follows a string of opportunistic exercises in liability management, including ATM equity offerings throughout 2021. In June 2021 AMC raised around $587m at an average share price of $50.85, close to its peak of ~$60 / share. It has since shed value, closing yesterday at $14.85.

Norwegian cruise operator Hurtigruten placed the smallest and most expensive deal of the week – a €50m green Senior Notes offering due 2025 at 11% (98 OID). Green projects include the upgrade of three ships to battery-hybrid power, which should reduce CO2 emissions by 20%, and NOX by 80%. Prior to this transaction, the group had recently increased its E+800 bps Term Loan C by €25m (to €130m) in late December, bringing year-end liquidity to €73m.

High Yield Secondary

Following last week’s -0.87 pts decline in HY, this week saw another -0.84 pts drop, as some 83% of instruments tracked by 9fin registered a loss. Hawkish commentary from the ECB led to sharp declines on Friday, and the iTraxx was seen up at 315 bps, a punchy 35 bps increase on the week. 

In fund flows, Bank of America Global/EPRA Research reports outflows for Global- (-$1,234m) and US-focused funds (-$590m), building on recent outflows. For the second time in 2022, there were significant outflows for Euro-focused funds (-$477m). High yield outflows are now the largest since March 2020.

By Industry, the worst affected were Consumer Staples (-0.94 pts), followed by Communication Services (-1.14 pts), Real Estate (-1.31 pts) and Energy (-2.77 pts). Despite the broader softening, single names continue to weigh heavily on specific Industries. Adler bonds fell nearly -2 pts, with Bloomberg reporting Goldman Sachs traders have followed JPMorgan, purchasing CDS. And as 9fin reported, Saipem’s bond sell-off has intensified as the market looks closer into contract profitability – the SUNs are 19 pts lower this week. If you would like to request a copy of our Deep Dive into Saipem, please complete your details here.

Telecom names have also been hit. When excluding Telecom Italia’s notes, instruments across the sector have lost -1.2 pts this week, with the average price across all debt tranches at just 95.4.

If we turn to security types, SS FRNs have held firmer, dropping just -0.38 pts versus -0.84 pts for SSNs, and -0.94 pts across SUNs. Compare this to European Leveraged Loans, where instruments have largely held flat, down -0.06 pts on average.

Leveraged Loans Primary

Credit bifurcation is the word on everyone’s lips in Levfin at the moment, as pricings are diverging depending on credit quality. We are seeing deals smoothly upsize and tighten or offer hefty premiums and scale down in the same week. 

Israel resin-maker Keter has forsworn the loan market and postponed its €1.175bn Term Loan B this week, citing demand for a higher premium than owner BC Partners was willing to pay, LPC reported. And as mentioned above another victim of buyside hostility was US chemical company Covis Pharma

The wobbly markets for tainted credits might indicate the primary pipeline will ease off from opportunistic repricings. 

“So far from discussions with banks, they are saying there is a healthy pipeline. But banks always say their deals are great, but if it's just a bunch of opportunistic transactions, the pipeline will dry out for us,” said one buysider. 

Buysiders spew words like “horrendous” when describing some credits, but what ties all of them together is accompanying aggressive documentation. Some investors started applying a straight decline strategy or laundry lists of demands, depending if they are keen on credit.

“Pricings shows if you have good quality credit, the market is positive and everyone will pile on. So the deal is going to get done, price tighter and allow very aggressive docs,” said the second buysider. 

Dutch entrant from the midmarket Group of Butchers was a harder meal to digest. The artisan meat maker had to add a hefty 50 bps premium, and discount issuing price by 0.5 points to price its debut €330m TLB this Tuesday – three days after its original commitment deadline.

On the other hand, usual suspect of the Levfin market, Belgian House of HR, has managed to upsize its add-on by €40m to €190m and still tighten OID to par from 99.5 when pricing at E+375 bps. “The name is always in the market, we like the business but this time we’re full on the name, so we had to pass,” said a third buysider. 

New lows

The Buyside was also keen on Dutch chemical distributor Caldic, but documentation once again left a bit of a sour aftertaste after initially dubbed ‘the worst of the worst’ by some investors. Voting rights were eroded to the historically lowest level in Europe with a 15% cap. This novelty stayed in the final documentation but leads at the end made several concessions on documentation before pricing the €990m-equivalent TLB financing at the tight end of initial price talk. 9fin highlighted aggressive documentation in our preview of the credit. 

France-based glass bottle manufacturer Saverglass enjoyed a smooth finish to its €500m recap and refi (B2/B).  Buysiders appreciated a high-proof investment case for the firm, which produces premium wine and spirits bottles. A strong customer base and stable demand profile allowed for tightened final pricing of E+425 bps and 99.5 OID. 

The motorcycle racing competition rights owner Dorna Sports finished the race for its debt financing as a winner, underpinned with strong contracts and solid cash generation (if you are not a client, you can request our preview here). Buysiders brushed off the threat of new Covid-19 variants, and despite tight pricing and a lack of a compelling equity story, the €975m TLB tightened OID to par from 99.5 pricing at E+375 bps.

New joiners

Global leader in windows, Hunter Douglas, is tapping the market with a mammoth €4.1bn equivalent debt package. The family-owned and publicly traded market leader is being taken private by buyout house 3G who will own a 75% controlling stake. The Buyside expects that more cost savings could be achieved under PE ownership. “I am relatively positive on the name. Historical performance is straightforward, given it is a cyclical business and leverage is not too high considering the adjustments,” said the first buysider.

Another LBO from Spanish aerospace engine company, ITP Aero, is also in the market to fund a Bain Capital takeover. The company’s TLB is solely focused on the US market, offering only a dollar tranche. 

As if syndicate banks were running out of opportunistic credit or rather taking a breather, only two other deals were announced this week. Both came from market familiar health care names. French lab provider Cerba is tapping the market with a €650m TLB to fund a new acquisition while German off-patent especially meds manufacturer Cheplapharm is refinancing its existing €980m TLB and adding a €500m upsize. Confidence of both issuers is shown in allowing for a just week-long syndication process.

Leveraged Loans Secondary

Secondary stayed afloat this week, with investors eyes mainly focused on the slew of primary pricings. Almost all industries tracked by 9fin dipped minutely this week, led by Communication Services at -0.12 pts and Real Estate at -0.09 pts. Only the Materials sector rose by +0.03 points and Energy remained unchanged. 

The biggest rise was recorded by Lecta, which picked up +6.6 points from 90.9 to 97.5, after it announced price increases up to 15% in all of its markets. 

Pandemic affected names Comexposium and Cineworld were the biggest decliners with loans falling -1.13 and -1.1 points, respectively. 

Line

LevFin Wrap is published weekly to 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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