Market Wrap

LevFin Wrap - Hot Gas and Cold Showers

Huw Simpson's avatar
Michal Skypala's avatar
  1. Huw Simpson
  2. +Michal Skypala
10 min read

High Yield Primary

August is nearly upon us, which means the prospect of a well-earned break. Primary is expected to stay quiet but second quarter earnings have now started in earnest, keeping analysts busy.

Macro developments continue to dominate market news. From Wednesday, gas flows through the Nord Stream 1 pipeline were cut back to 20% (from 40%) of capacity by Gazprom – which sent Dutch TTF gas futures soaring +30% versus Monday. And on Friday, flashes for eurozone GDP show growth of +0.7% and July inflation of 8.9% (June 8.6%) – adding to calls for further, aggressive monetary tightening.

Rising prices were certainly the theme of Wednesday’s FOMC too, confirmed by the widely expected +75 bps hike, with Powell leaving a similar sized hike on the table for September. New data over the coming weeks will be crucial, as the Fed reaches its ‘neutral-rate’, and markets look ahead for signs of easing inflation. Headlines suggest the US may now be in recession, after posting a second quarter GDP contraction of -0.9% – though technicalities mean NBER actually look across a broader range of factors before making the official designation.

Back in Europe, we’ve been following several PE developments. Bain Capital – owners of the Italian paper and label manufacturer Fedrigoni – are teaming up with BC Partners, and have reached a joint-ownership deal which values the group at €3bn. Although a press release describes this event as a change of control, Caitlin Carey outlined why in our view, there will not be a CoC offer. LPC reports the deal has been underwritten by a Goldman Sachs led group including BPER, Intesa Sanpaolo, Morgan Stanley, Nomura, Banco Santander and UniCredit – who plan to refinance a €1.18bn bridging loan with a €1bn bond, split between fixed and floating, expected to launch in September. It’s certainly positive to see fresh underwriting with caps and flex aligned to current market conditions.

The other big news of the week was the binding offer CD&R made for Atalian, the French facilities management company. As expected, the bonds – which have steadily traded off throughout the year – jumped up +20 pts to just shy of par. On Thursday’s conference call management outlined the Sponsor's plan to merge the group with UK peer OCS Group. This was revealed by Sky News back in May, but only pushed the bonds to ~90. The existing SUNs will be repaid on closing of the deal (tentatively guided in late 2022 or early 2023), and post merger the group will have a significant presence in the UK. The UK segment will more than double from €787m in FY 2021, to €1.6bn combined – which may give rise to significant regulatory and competition issues as 9fin’s Denitsa Stoyanova reports.

Atalian Senior Notes

CD&R’s news comes at a time when efforts to sell its portfolio company Motor Fuel Group are stalling, according to Bloomberg. Disagreements over the valuation, as well as availability of financing, are cited as reasons. The Sponsor also owns Morrison’s, which was the subject of FT splash reporting on: “How the Morrisons buyout turned into a nightmare for Goldman Sachs”. In Bloomberg’s latest update, it appears PIMCO has bought another €600m slug of the grocery store’s discounted LBO debt.

And finally, Apollo-backed Landesbank helps payments LBO over line.

High Yield Secondary

Despite a ~45 bps pop on Tuesday, presumably following news of further restrictions on gas supply, the iTraxx Crossover tightened through the week, ending at 526 bps on Thursday’s close. Most interestingly, fund flows by BofA Global Research and EPFR Global report inflows (!) for Global- (+$33m) and Euro-focused (+$264m) funds, with only small outflows for US-focused funds (-$188m).

Although lower than last week’s +1.46 pts gain, large portions of the market made some further advances, and prices were up +0.65 pts on average (77% +0.99 pts | 20% -0.52 pts). Energy companies reported the strongest performance by Industry – up +1.01 pts – as Saipem posted upbeat earnings following its €2bn capital raise, and CGG increased H1 2022 EBITDAS +130% YoY, driven by higher Earth Data after-sales and sustained Geoscience activity. Saipem SUNs were up an average of +3.0 pts, and CGG SSNs +2.6 pts.

Among Consumer Discretionary names (+0.82 pts), Ontex SUNs marked the largest gain, +4.5 pts. Despite poor operational performance, the divestment of its Mexican business for an EV of €285m should provide support, and is expected to close in early 2023. Proceeds from the sale will be ~€250m, of which €225m is to pay down the €220m TLA due 2024. Net financial debt ended the quarter at €715m, which in addition to the TLA, includes €580m of Senior Notes due 2026, and a €50m drawn under the €250m RCF.

There were developments across several Telecom names too:

  • Iliad announced the successful placement of three bank financing facilities for an aggregate of €5bn, from a pool of 23 banks. The facilities include a five-year €1bn term loan, a 2.5-year €2bn facility to provide “unrestricted financial agility”, and a €2bn RCF to replace the existing €1.65bn facility.
  • Media reports of a Virgin Media–O2 £3bn offer for TalkTalk emerged in mid-July. Today, it was announced that owners Liberty Global and Telefónica (alongside InfraVia Capital Partners) will form a JV to build a new full fibre network in the UK. The £4.5bn investment is supported by £3.3bn of fully underwritten financing commitments, and up to £1.4bn in equity commitments.
  • Orange and Masmovil are to merge their operations in Spain. With combined revenues of >€7.3bn, and EBITDAaL of >€2.2bn, the group hopes to generate synergies of >€450m from the 4th year post-closing. A €6.6bn financing package mainly comprises bank debt, and the group targets leverage at closing of less than 5x, targeting 3.5x in the mid-term for an IPO.

Leveraged Loans Primary

Ignoring vacations, the loan market staged a limited summer comeback this week. A few issuers quickly reacted to the return of positive sentiment and used the window to revive their pulled syndications or bring swift opportunistic add-ons to fund their bolt-on needs.

Scandinavian business supplies distributor OptiGroup has restocked, finally printing its LBO financing after its original transaction failed to gain sufficient traction in mid-May.

Significant tweaks were made to the deal structure, with the TLB reduced to €365m from €515m at the original launch on 9 May. A new €200m second lien loan was pre-placed with a single fund in the E+800 bps area with undisclosed OID, although at a level broadly in line with the current market, according to sources close to the deal.

The downsized €365m first lien TLB was marketed with unchanged margin at E+525bps but printed with 90 OID compared to previous talk in the 94-95 range.

The revised pricing was even able to attract buysiders who disliked the deal at first look in May.

“I actually put a small commitment in, because the current pricing was good for a small position,“ said one buysider who initially declined the deal.

The financing is supporting a buyout by FSN Capital, who are merging OptiGroup with the Netherlands-based distributor Hygos. FSN Capital is adding €230m of new equity, which combined with implied and rolled equity of €425m, gives a €655m equity cushion. Triton, Altor, RoosGruppen and management will all retain minority stakes in the company.

Previously buysiders pointed to an unfamiliar sponsor, paper-thin organic growth and a vulnerable position as a middle man exposed to ‘Amazon-risk’ as the most contentious points about the credit. However, after the Hygos merger, the business will have a strong market position, good customer and supplier diversity, and high cash generation.

“Current trading was good and their variable cost base enables them to weather volatile performance,” adds the buysider.

It also helped that the new capital structure is sporting significantly lower first lien net leverage, thanks to a pre-placed second-lien portion and improved EBITDA.

The new deal is marketed on EBITDA of €173m, which adds €19m from two recent acquisitions, plus €16m expected from synergies. In addition to €24m of cash on balance sheet, around €55m of the €60m RCF is now drawn, with proceeds used to fund the M&A.

“I can still see some material execution risk and don’t like the unknown sponsor, but given that management and Triton are rolling their equity in, that gives me comfort,” concludes the buysider.

Elsewhere, Luxembourg-headquartered specialty pharma business Neuraxpharm managed to tap the market with a new add-on in an express two-day turnaround.

The fungible €175m TLB tranche (B3) will pay an E+425 bps margin – in line with the existing €700m debt – and was initially guided in the 92-93 range. Commitments were due at noon today (29 July).

According to second buysider, deal has already managed to tighten. “We're at 94 which isn’t great,” they added.

Neuraxpharm is using the proceeds to acquire two product portfolios for CNS disorders, pain and vascular diseases from Sanofi, for an undisclosed amount, while Permira, the company's sponsor, is injecting €155 million of new equity.

And lastly, French independent footwear manufacturer Courir successfully tapped the market, managing to print a €130m TLB at E+475 bps, but with an undisclosed OID. The deal also includes €80m of TLA debt paying E+325 bps and a €34m RCF paying E+325 bps – the latter upsized from €25m following an oversubscribed book.

Leveraged Loans Secondary

The secondary loan market has shown hopeful signs of bottoming out. All sectors picked up this week, from utilities and consumer staples up over +0.7 pts, to Financials, increasing almost +0.4 pts.

“Liquidity has been good this week, we’ve had solid interest from CLO rampers,” said one loan trader.

“The rally has been really helpful, you’ve seen the likes of Prosol increase a few points and it makes things a lot easier to trade, particularly with stressed names,” said a third buysider.

After weeks of silence, a new European BWIC is braving the buoyancy of the market rally.

Bids were due this Friday on a €48.5m-equivalent portfolio, slicing a wide range of sectors in the market. The largest position is a €2.45m TLB from Diaverum, followed by £1.64m from Tilney Group and a £1.22m slice of Accolade.

The full list of positions offered are given below.

One of the biggest risers was Tarkett, the France-based designer and manufacturer of durable flooring. The €950m TLB firmed up almost six points to 84.3-mid this week on positive H1 22 earnings. As covered in our earnings analysis, buysider views are still splintered as high raw materials costs and significant exposure to Russia cast a shadow over 2022 performance. Moody’s, S&P and Fitch downgraded the company to B1B+ and B+, respectively, between March and early April 2022.

Another French name, and the biggest decliner this week was Expleo (former Assystem Technologies). The engineering, technology and consulting service provider saw its €494m TLB slide over eight-points from 92.9-mid to 84.7-mid. At least two holders of the loan were puzzled by the Thursday move and point to a rogue sale marking the tranche down.

“We are equally confused. I think there has been a seller, and at the moment the market is fairly illiquid, so transactions move levels quite a bit, that's the only explanation we see right now,” said a seventh buysider.

Food producer Labeyrie’s €455m TLB continues to slide, losing another -3.5 pts this week and is indicated at a new floor of 74.2-mid. The company reported tasteless results as it battles with rising costs and limitations on negotiating with suppliers in France. Inflation and sluggish sales have put pressure on margins, however leverage remains manageable and the sponsor supportive — lenders do not fear any restructuring in the near term despite long-term ESG shadows.

Another French food retailer under pressure is Euro Ethnic Foods, which in its annual budget update moved its year end from December to March. Therefore, lenders are waiting for the official first quarter results due in August. Management gave guidance and admitted that the first quarter is going to be weak relative to peak numbers in lockdown, where the supermarket supplier benefitted from closed restaurants.

“March should be very weak with double digit declines in EBITDA and the company will continue to be squeezed in April and May. In June we should start seeing a turnaround,” said an eighth buysider. “It is not yet in stressed territory, just a bit of underperformance and we are still comfortable with the leverage,” they added. The €645m TLB issued last February moved down into the low 80s from around 92 in mid-June and is currently indicated at 84.9-mid.

BC Partners-owned manufacturer of resin-based consumer goods Keter Group (B3/B) is indicated at 85-mid this week, up from the low 80s earlier in the month. The company reported another YoY EBITDA drop in May 2022, exacerbating lender concerns on the company’s rapidly approaching ~€1bn of October 2023 maturities.

Lenders do not expect a hard restructuring route, but believe more pain is to come for the company over the next 12 months as costs of some of Keter’s key inputs (such as oil-based resin) remain volatile and consumers shun discretionary spending.

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