LevFin Wrap - Europe's crude re-awakening, no drought about it
- Huw Simpson
- +Kat Hidalgo
High Yield Primary
Markets enjoyed a boost this week as July’s US CPI print came in below expectations, unchanged versus June. In turn, the improved sentiment bled into European markets, where the STOXX Europe 600 moved up ~1%, and the iTraxx Crossover dipped below 500 bps for the first time in eight weeks.
Oil be back
While the drop in the US price index was mainly driven by falling energy prices (-4.6% MoM), electricity prices are still rising (+1.6%). Across the pond, the energy picture remains bleak. Gas prices are soaring, hot weather is restricting wind power generation, and shallow water in the Rhine has limited the coal and fuel loads barges can carry. This combination helped European electricity prices hit record highs on Thursday, according to the Telegraph, with 2023 futures prices for German baseload power at €455 per MWh. And with energy bills forecast to exceed £4,200 by next year, a worrying “reasonable worst case scenario” by the UK government envisages organised power-outages for homes and industry.
So, not all good news.
Interestingly, despite wider concerns around a probable recession, the International Energy Agency (IEA) reports “soaring oil use for power generation and gas-to-oil switching are boosting [oil] demand”. Dutch TTF Gas Sep 2022 futures hit €208 MWh, above their peak in March. To compare, Brent Oil is now ~$100 /bbl, well inside the recent $120+ highs seen in recent highs in June.
Although less green, where firms have the flexibility to switch back from gas to oil, this may offer some comfort to margins. As in our Nord Stream 1 report, Raffinerie Heide and Arxada have this ability, with the latter able to flex on input for steam production and incineration plants.
The year so far
Bond issuance volumes are of course wildly down this year – at just €21.3bn (equiv.) for Euro and Sterling HY debt, and €75.0bn (equiv.) for US Dollar debt. Interestingly, 2022 volumes have seen near identical declines in both currency baskets. Compared to the average of 2020 and 2021, 2022 volumes for USD HY and EUR-GBP HY are both 3.6x lower.
The lack of deal flow, and appeal of floating rate debt meant that for the first time since Q1 2017, EUR floating rate secured debt actually made up a greater proportion than its fixed counterpart in Q2 2022 (we ignore Q3 on limited issuance):
Averaging ~44% of issuance over 2020 and 2021, single-B denominated EUR debt jumped to ~56% in the first half of 2022. Again the problem of fewer deals muddies the comparison, with totals of just ~€10bn in the first, and ~€3bn in the second quarter. But, it’s unlikely that much of this is due to downgrades – HY corporate ratings are largely holding up (see our EBITDA margin review last week) – though S&P expects rising input and financing costs may “drag on ratings in the latter half of 2022”.
High Yield Secondary
Matching last weeks gains, prices in Secondary rose another +0.63 pts, with over 80% of instruments on the up (82% +0.86 pts | 16% -0.49 pts). All industries were also positive, from low-beta Consumer Staples (+0.16 pts) and Real Estate (+0.39pts), to Communication Services (+0.73 pts) and Industrials (+0.78 pts).
And in other good news, data from BofA and EPRA Global shows that although fund outflows rose slightly for Global (-$71m) and US (-$119m) High Yield, Euro HY rallied round – posting a notable +$234m inflow.
The ICE BofA Euro HY OAS was last seen on Wednesday at 545 bps, over 100 bps inside its recent peak in early July. And the iTraxx Crossover has tightened further, almost 150 bps over the same period – last seen on Thursday at 479 bps. On an Industry basis, average spreads for Euro instruments tracked by 9fin have fallen around 150 bps in the last month, with Healthcare notably dipping below 5%. Real Estate predictably remains the widest, as German troubles weigh on the industry.
The largest gain of the week goes to SIG plc – the UK building products group – whose 2026 SSNs leapt +6.5 pts on H1 results. Like-for-like sales grew 21.2%, and both gross and operating margins rose, as price and volume increases outstripped inflation in salaries, energy and fuel costs.
Merlin Entertainments also reported encouraging results this week. H1 revenues more than doubled versus the prior year, and EBITDA jumped from just £15m to £215m. Higher attendance and greater revenue per visitors helped lead the charge. Instruments across the capital structure rose an average of +2.4 pts this week. The broader recovery was reflected by Disney Parks, who recorded +70% YoY sales growth for the quarter ending July 2022, with the best performance in domestic parks and resorts.
Elsewhere, Danish Telco TDC Group’s HoldCo SUNs popped on its new refinancing plan, announced in their Q2 presentation on Friday. The current structure includes both an OpCo (now known as ’Nuuday’) and the NetCo. As 9fin’s Nathan Mitchell reports, the base case is to refinance the HoldCo bonds via a TLB raised at Nuuday, a new private HoldCo debt instrument at DKT Finance, and the use of €207m liquidity at the HoldCo. Management on the Q1 call mentioned leverage at Nuuday of ~3.5-4.5x would be a fair level, which based on LTM EBITDA of €236m suggests net debt of around €824m-€1,060m. This, and current liquidity leaves around €300m-€400m left to be dealt with by the private instrument.
In Italy, Bloomberg reports far-right ‘Brothers of Italy’ party – a favourite for next months election – has proposed a plan to take Telecom Italia private, and sell off assets to cut debt levels in half. Prices rose ~2pts across the group’s outstanding SUNs.
Given the broad market upswing, there were relatively few fallers. Nevertheless, Groupe Casino continues to slide (an average of -2.0 pts), and Victoria PLC – the subject of last weeks short seller report by Iceberg Research – 2026s shaved off a further -1.8 pts.
Leveraged Loans Primary
Another week, more primary quiet. Loan issuance is negligible, with just Marlink, the Norwegian satellite communications company from Europe, still to price. The business is issuing an $815m TLB to support its acquisition by Providence Equity Partners from Apax. While the company has previously issued in Dollars and Euros, the company is no doubt looking to benefit from the depths of liquidity currently available in the US market, with this USD-only tranche.
As the first buysider said: “The US market is a lot more liquid and it’s easier to price deals there, even right now. The market isn’t much better in Europe – and they can get dollars.”
ETC Group was in a similar position last week, intending to issue almost $1bn only in dollars; however, likely because of muted interested from American investors unfamiliar with the France-based telecom equipment distributor and wary of the difficult macro environment in Europe, the company ended up issuing a €475m tranche also.
Sellsiders up against savage conditions have tapped every pocket of liquidity that they can this summer and are now generally resisting taking on new credits and guiding sponsors to extremely expensive terms. “It’s a way of saying not to clients, without actually saying no,” said a second buysider.
A first sellside source sees this as an opportunity: “We’re still doing deals and have decided to take the pain now. We should be proving to these sponsors that we are there to support them. If you keep offering your clients solutions you will take market share.”
However, even this stoic sellsider admitted the party can’t last for much longer: “We need the CLO machine to get going again. When you’ve got anything of size you need that buyer base.”
In the ever more creative effort to shift debt, especially for larger deals, financing for an Orange-Masmovil merger will likely go via the Bank TLA market, according to LPC. This is a trend White & Case says has accelerated this year.
Though this will provide the solution to the mega Masmovil-Orange €6.6bn financing, the sellside source was reticent to suggest this would be an option for just any deal: “The banks have now filled their buckets and it’s not going to get any easier.”
Leveraged Loans Secondary
Loans are in the green this week, continuing the rally that’s swept the market since the end of July. Indeed, the chart below looks greener than most London parks in Spring.
Consumer Discretionary rose the most (+1.0 pts), while IT moved the least (+0.3 pts), presumably because the sector hasn’t fallen as far as its more cyclical counterparts YTD.
Though the rally has provided relief for analysts that have watched their names drop, particularly those looking after industrials, chemicals and food businesses, this has not shifted the mindset of PMs looking at these types of businesses. “People are kind of sick of cyclicals,” said the second buysider.
But even with this market rally, lenders haven’t yet been able to take advantage. The second buysider said: “There’s no liquidity coming up or down. It’s good because you have to stick by your positions.”
The highest climber this week was cruise line and shipping expeditions company Hurtigruten’s €575m TLB. It rose 9.4 pts from out of the 70s to sit at 83.75-mid on Thursday.
While the company has enjoyed a post Covid uptick to its sales (YoY revenue rose by 169.2% in Q1 of this year, after virtually no sailings last year) it still has high teens leverage and sizeable near-term maturities. To add to that sinking feeling, the sailer went to CCC+ after a S&P downgrade in mid-June, partly due to liquidity concerns.
The company had just €35m in unrestricted cash on its balance sheet as of March 2022 and its €85m RCF was fully drawn, according to the ratings agency.
The TLB has floated upwards this week on news that majority revolving facility lenders have agreed amendments, extending the leverage-ratio financial covenant suspension to September 2023. A minimum EBITDA test – which applies during the suspension – has been adjusted to €25m for the quarter ending March 2023, and €36m for the quarter ending June 2023. Happily, Hurtigruten also announced a new €55m shareholder loan to fund ongoing environment projects and shore up working capital.
Some of the other largest movers this week include healthcare businesses Domidep and Almaviva Santé and chemicals company Arxada, each rising by around four-points.
In such a buoyant market, only 29 of 568 loan instruments fell this week. All these credits, which include chemicals business Röhm, consumer durables business PDA, and payments company Paysafe, fell by less than a point, with the exception of GenesisCare and Groupe Casino.
As previously reported, GenesisCare lenders felt better after KKR provided an interim cure to liquidity for the oncological and cardiovascular care provider, according to two buysiders. The sponsors had promised an injection by the end of June and KKR, one of the three sponsors owning 33% of the business, injected A$75m ($51m) via a one-year bridge loan at the equity level.
Nevertheless, the loans continue to trade lower due to concerns on business performance and sharply rising leverage after a poor third quarter to end-March. The sale of the cardiovascular unit, announced last week netted less than expected, according to a third buysider. The Australian Financial Review put the price at between A$200m and A$250m, compared to expectations of around A$300m. In a lender update this week, the company said that the turnaround of the troubled US business would take longer than expected, the buysider added.
For focused covenant analysis on the credit, see here.