Market Wrap

LevFin Wrap - Hot Cross Bunds

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  1. Huw Simpson
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9 min read

High Yield Primary

It’s been a short week, so we’ll keep the updates brief. Expectations are upbeat for a post-Easter re-opening of High Yield, with plenty of action to report in the M&A space despite ongoing macro volatility.

Up from 6.2% in February, rising transport and housing costs helped drive UK CPI to 7% in March. Economists at Deutsche Bank now expect CPI to cross 9% YoY in April’s data, and to average 8.3% for 2022. Marking the growing contest between growth and inflation, the BoE base rate is expected to increase just 25 bps in May. In Europe, the ECB today stated it would retain “optionality, gradualism and flexibility” in its approach to monetary policy, but gave no guidance on when rates would start to rise. The German 5-year bund – which has risen more than 100 bps since Russia’s invasion – now yields 0.58%.

Shopping spree

Tesco released preliminary results on Wednesday, with retail adjusted operating profit up 34.9% YoY to £2.65bn, although guidance for 2022/3 is sluggish at £2.4bn-£2.6bn. The UK retailer hopes to offset a portion of cost inflation by accelerating its ‘Save to Invest’ programme, which targets £1bn in savings, including the closure of the experimental discount brand ‘Jack’s’. FT’s Lex suggests inflation is a ‘political hot potato’ for Tesco, as it’s historically boosted supermarket profits, and the group’s 27% market share creates significant buyer-power.

There were also further happenings at the UK’s fourth largest supermarket, as all three agencies assigned new ratings ahead of Morrisons’ syndication. Both Moody’s (B1) and S&P (B+) placed high single-B ratings, with Fitch more generous at BB-. S&P notes that size and scale are becoming increasingly important in UK retail, and expects synergies of around £50m between Morrisons and Motor Fuel Group – both of which are controlled by sponsor CD&R.

Elsewhere, Sky News reports potential takeovers at two UK holiday camp operators. Among other bidders, Apollo has progressed to the next stage of a potential £2bn takeover of Parkdean Resorts. Blackstone-owned Bourne Leisure – which was eliminated from the Parkdean auction – also owns Butlin’s, which has attracted bids from several PE groups in recent days, including Fortress Investment Group, TDR Capital and KSL Capital Partners.

It also emerged last week that Edizione – a holding company for the Benetton family – is teaming up with Blackstone for a takeover offer of Italian infrastructure group Atlantia. Thursday’s tender offer of €23 / share values the group at €58bn, and represents a 24.4% premium compared to the share price as of 5 April 2022.

Although not strictly European HY, Elon Musk today made an offer to buy Twitter. The deal would value the business at an EV of $41.3bn, and details can be found here. The company’s $1bn 5.000% Senior Notes due 2030 are up about a point on the takeover offer, at 99.2. Its $700m 3.875% Senior Notes due 2027 are up just over one and half points, at 97.6.

9fin’s Will Caiger-Smith updates subscribers here.

High Yield Secondary

Within Secondary, instruments traded down an average of -0.63 pts (13% +0.42 pts | 85% -0.81 pts), now more-or-less flat on the month (+0.08 pts). Again, Energy (-0.07 pts) proved the most resilient sector, while Consumer Staples (-0.93 pts), Healthcare (-0.94 pts) and Real Estate (-0.95 pts) saw meaningful drops.

Real Estate performance was – unsurprisingly – driven by pricing deterioration in the extended Adler Group. Back in late March, Bloomberg reported Vonovia is ‘playing down the prospect of a takeover’ for Adler. The KPMG special investigation into Viceroy allegations is expected on 22 April, and full year financial reports will be published in the last week of April.

Adler Group Senior Notes

Weaker performance in the Food Products sector explains some of the drop in Consumer Staples names. Flora Food Group (Upfield), saw its USD and EUR SUNs down -4.3 pts and -1.8 pts respectively. As we highlighted in our deep-dive (if you are not a client but would like to request a copy of our Deep Dive, please complete your details here) and Q4 earnings report the group faces various headwinds, not least higher edible oil prices and logistics costs. S&P today (14 April) downgraded the group from B to B- on slower than expected deleveraging.

Several supermarkets registered notable losses, retracing the recovery seen in late-March. Asda’s SSNs and SUNs all fell around -1.6 pts on the week, while Groupe Casino’s 2025, 2026 and 2027 SUNs each dropped between -3 pts and -4 pts. Similarly, Nomad Foods 2028 SSNs were down -1.3 pts, and Iceland’s 2025 and 2028 SSNs -1.2 pts.

Asda: YTW on Senior Secured and Senior Notes

TalkTalk’s SUNs – which jumped around five pts to 92.1 last Friday – have softened slightly this week, last seen today at 91.8. Taken private only 16 months ago, Sky News revealed potential interest from Vodafone, among other groups. Toscafund purchased TalkTalk for £1,861m on an EV/EBITDA multiple of 7.9x, and now believe the group is worth at least £3bn.

Leveraged Loans Primary

Primary is expected to resurrect after Easter, with a heavy flow of European leveraged loan deals hitting investors screens on Tuesday, symbolically a day after Easter Monday.

Refresco, the Dutch soft drink bottler is one of the bigger LBOs that was heavily pre marketed with investors for an Easter launch, according to Loan Radar. KKR is becoming a majority shareholder after paying an undisclosed sum to PAI Partners and British Columbia Investment Management Corporation. The two funds bought the company in 2017 for $3.4bn, according to Bloomberg.

The crossborder $4bn-equivalent credit facility will offer investors a €1.53bn TLB, a €1.5bn-equivalent dollar-denominated TLB, and a €340m-equivalent sterling-denominated TLB. Bookrunners Goldman Sachs, JPMorgan and KKR Credit are expected to launch the financing into general syndication next week.

The tightening of syndication prints which braved the market this week is giving some comfort to the sellside bankers that primary loans can hold firm against market wobbles, and that demand for fresh paper is out there.

“Right now, the market is in investor’s favour, but everyone is waiting to see how the big deals hitting the market set a precedent, [and] after that, the market will start to turn,” said one buysider.

Triton’s £1.3bn take-private of UK pharma group Clinigen also received some help from pre-sounding. The transaction was already fully covered at time of its launch into general syndication, and in addition many new lenders have committed since, sources close to the deal told 9fin.

However, many investors who encountered the name only this week are still undecided. Some are still grappling with the complex business model. The main question is if the added-value servicing segment — stretched across multiple divisions, including managing clinical trials and access to unlicensed markets — is attractive enough to compensate for a declining legacy business which lacks diversification and faces heavy competition.

A £400m euro-equivalent first-lien TLB is guided at E+475 bps and a £200m first-lien TLB at S+575 bps, both floored at zero with a 98 OID. Completing the financing is a pre-placed £140m second lien TLB paying S+825 bps. The facilities are rated B2/B/B.

Marketed off Adjusted EBITDA of €134m (LTM Dec 21), Clinigen holds £10m of cash on balance sheet, and has 4.6x senior secured net leverage through the first lien and 5.7x total senior secured. Buysiders expect the transaction will tighten to at least to E+450 bps on the Euro tranche as unusually, the docs are lender friendly, which should help smooth the deals progress.

More to follow in 9fin’s upcoming preview. Commitments are due on Wednesday (20 April).

Spanish building materials business Cupa Group plans to print a €480m TLB next week to support its acquisition by Brookfield. The B2/B rated tranche currently sports price talk of E+475 bps, with a 98-98.5 OID. This compares with Brookfield-owned recent issuers Dexko and Modulaire, which priced their most recent euro-denominated TLBs at E+400 bps and E+475 bps, respectively, these deals are currently trading with 94 and 98-handles respectively.

Brookfield paid €835m for the company in January 2022, an 8.3x EV/EBITDA multiple. This compares to an average multiple for industrial businesses between 2020 and 2022 of 9.8x, according to 9fin.

While Cupa boasts a low purchase price, conservative add-backs and healthy margins, the natural slate producer has found itself at the centre of a buyside debate. Difficult docs and squeezed consumer spending are topics of controversy, while even the ESG credentials aren’t crystal clear, say buysiders.

Lenders will also have to take a view on the buildings materials sector, and the deal will be an important bellwether for smaller, cyclical assets in the market post reopening, sources told 9fin.

The absence of primary for several weeks, has benefited those issuers which emerged first upon reopening.

UK lab testing firm Element Materials Technology managed to tighten its pricing in line with those paid by issuers in February, before the wider market sell-off, and the issuance pause. Its $400m (€ equiv.) TLB priced at E+425 bps and 99.5 OID, in from E+450 bps and 98 OID guidance. This is despite buysider’s comments who claimed “[single-B] credits need to be at around 450-475 [bps] to get done”. The $1,425m TLB also flexed to price at S+425 and 99.5 OID, from S+ 450bps and 97.5 price talk.

In our preview, investors praised Element Materials Technology as a well tested credit riding positive underlying industry dynamics. (If you would like to request a copy of our preview, please complete your details here). However, significantly increased leverage and a hefty valuation were a test for buysiders nerves, who fretted about an aggressive acquisition history, concerned the business may continue to acquire prolifically with debt-funded roll-ups. Ratings agencies, however, believe that new owner, Singapore’s Temasek will be less aggressive.

US manufacturer of controlling devices MKS Instruments also managed to flex and upsize the euro portion of its TLB offering to €600m, from €400m. The dollar tranche was downsized accordingly to $3.6bn from $3.81bn. Final pricing was cut by 25bps on both euro and dollar tranches, to E+300 bps and SOFR+275 bps and with 98 OID, unchanged from launch.

Leveraged Loans Secondary

Secondary market activity was fairly muted, limited by a shortened trading week, with buysiders concentrating on an increasingly active primary and pre-sounding processes. There were no BWICs offered in the secondary market for the second week in a row.

“Loans are holding firm and there are fewer opportunities now to pick up [paper] outside of the very distressed names. Everyone is waiting [to see] how the big post Easter prints turn out,” said a second buysider.

Austrian packaging company Schur Flexibles was the biggest loan decliner this week, moving down -1.8 pts to 66.8 as of latest price on Wednesday (13 April). Lenders are still awaiting a new plan, sources told 9fin. The company is likely to enter a restructuring process, as reported, with lenders shocked to hear in February that third party investigations had found accounting irregularities, causing the loans to tank into the 60s. Lenders were promised initially a new budget at the start of the month but that deadline has been moved to mid-April.

The second biggest decliner was French supermarket chain Groupe Casino which fell -1.7 pts to 95.1, mirroring declines seen in the EHY food and food retailer sectors (see HY secondary). After an impressive performance last week following its Q4 earnings call, Kloeckner Pentaplast gave back some of its gains this week.

Overall, Consumer Staples was the industry sector which performed worst, but was down just -0.14 pts on average, with most other sectors little changed.

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