Market Wrap

LevFin Wrap - Lift-off for Hawks

Huw Simpson's avatar
Kat Hidalgo's avatar
  1. Huw Simpson
  2. +Kat Hidalgo
11 min read

High Yield Primary

Truncated by Jubilee celebrations, last week offered little on the Primary front, and news of Mr Johnson’s (no) confidence vote failed to rouse support for Monday’s markets. Just as the UK PM survived — despite a 41% revolt — some timid deal flow arrived mid-week from a pair of more peripheral HY names.

It’s party time

It was a big week for macro announcements though. The ECB will conclude net asset purchases by the end of this month, intending a 25 bps rate hike in July. On a more hawkish outlook, Deutsche Bank economists now expect two 50 bps moves in September and October, and a further 25 bps in December. Elsewhere, the BoE is widely expected to increase bank rates by at least another 25 bps in next week’s June meeting.

A rising tide

On Tuesday, Nordic cruise operator Hurtigruten mandated Danske Bank and DNB Markets as JBRs on a possible €25m tap of its existing €50m Green SUNs. Proceeds would be used to fund environmental upgrade projects, as part of a target to reduce CO2 emissions by up to 25% and NOX emissions by up to 80%. In addition to the notes, owner TDR Capital plans to contribute equity or subordinated capital of the same amount.

Liquidity at year-end 2021 was just €48m — and despite the addition of €50m SUNs and a €25m TLC increase in Q1 — interest costs, capex, and cancellations all helped burn through cash, leaving just €35m at quarter-end. Free liquidity will rise to €85m (excluding €10m restricted cash) pro forma for the offering.

Elsewhere, Media and Games Invest (MGI) mandated Pareto Securities to investigate the possibility of issuing €125m SS FRNs due 2026. Despite no ‘particular liquidity need in the near future’, the advertising and software platform is keen to ensure available capital for potential M&A opportunities, and to maintain a diverse maturity profile. Back in April MGI acquired AxesInMotion, a mobile racing game developer for €55m (plus up to €110m earn-out), financing the deal with a €30m capital raise and cash on hand. The group has acquired more than 35 companies and assets in the past six years, according to LPC.

Landing on guidance and upsizing to €175m, the deal priced on Thursday at E+625 bps with a 98 OID. As part of the transaction, MGI repurchased €115m of its outstanding E+575 bps 2024 SSNs.

Trading up on the break, the new notes were seen at 98.8-mid on Friday morning.

High Yield Secondary

In another ugly week for Secondary, instruments fell an average of -0.96 pts with all industries in the red (10% +0.69 pts | 88% -1.17 pts). Real Estate (-0.26 pts) and Financials (-0.45 pts) were more robust, while IT (-1.01 pts), Consumer Discretionary (-1.02 pts), Communication Services (-1.35 pts) and Healthcare (-1.65 pts) notched marked losses.

The iTraxx Crossover moved out another +34 bps by Thursday’s close to 471 bps — the highest in more than two weeks. And while BofA Global Research reported large inflows last week for US (+$930m) and Euro (+$157m) HY funds, outflows this week ate into US HY funds (-$705m), and more than reversed Euro HY gains (-$193m).

As we discuss in the Friday Workout, the Oil & Gas sector has had a tough time in recent years, where despite the surge in oil prices (Brent is now at ~$123), energy transition has weighed on the sector. In single-name moves, Tullow gave back some of the gains registered after the announcement of its merger with Capricorn Energy, down -5.4 pts this week, while Raffinerie Heide managed a +2.0 pts gain, undeterred by facility shutdowns which reduced volumes to a five-year low.

It was a similar story for wood pellet producer Graanul Invest, who recorded the largest decline of the week — the 2026 SS FRNs and SSNs dropping -8.5 pts and -7.4 pts respectively. A lack of spot pellet supply has worsened due to the Russia-Ukraine war, and output was further hampered by plant down-time. Despite an increase in sales prices, delays in cost pass-throughs pushed EBITDA margins down 8.2% pts to 20.0%. Interestingly, production volumes are usually lower in the first quarter anyway, due to the groups limited drying capacity, needed for wetter raw materials over the winter months.

After news that Jean-Luc Petithuguenin, president of Paprecspent a day in police custody (31st May), bonds at the French recycling group have steadily traded off, with the 2025s from around par to 86.8 today. According to Le Figaro, charges were not specified, but relate to the award of a public contract in the waste treatment sector.

In positive moves, ATM manufacturer Diebold Nixdorf €350m 2025 SSNs managed a +2.8 pts gain to 76.1, after dropping to lows of 70 in late-May. As we tackle in our Stressed QuickTake, the group saw the weighty combination of lockdowns, supply chain delays and rising costs reduce Adjusted EBITDA to just $9.4m in the first quarter of this year. Management expect margins to improve in Q2, before normalising in Q3-Q4 as it re-prices customer backlogs and invests in a new Ohio manufacturing plant.

And finally, Cogent saw its €350m SUNs jump from ~98.9 to a second call take-out at 101.09. The internet service provider priced some $450m SUNs due 2027 at 7% this week, with proceeds to refinance the euro notes. If the Euro market remains closed, is this a policy more reverse yankee issuers might employ? A list of potential candidates can be found here.

Leveraged Loans Primary

Add-ons and small deals were the only primary joy for analysts in the European market this week.

TA Associates and Clearlake International are acquiring Kofax, a US-based software platform, with debt finance including a €300m TLB and a larger $1.025bn dollar tranche. The B2-rated facilities are talked at E+525 bps, with a 0% floor and a 93-94 OID and S+525 bps (plus 10 bps CSA) and a 0.50% floor at 93-94, respectively. The deal could be punchy with a “tech” EV/EBITDA multiple of around 20x and senior net leverage of 7x, according to a one source.

Private credit is reportedly doing some heavy lifting for the deal. None of the second-lien paper is left on offer with up to the half of the US dollar tranche allocated, said one buysider.

“We’ve been seeing this a lot more. It’s a reflection of the growth of private credit and things going upmarket in terms of size and opportunity,” said a second buysider.

Pricing on the deal remains reasonably attractive even though Kofax is considered as offering less exciting software than sector peers. Some 30% of revenues comes from legacy printing automation services that could be made obsolete, said a first buysider. Management is pitching a shift from declining revenue streams from term and maintenance contracts towards perpetual licenses. This move, however will temporarily constrain cashflows. Revenues already took a slight hit in the pandemic when empty offices meant employees used Kofax services less.

“Compared to other software names it offers good relative value. There looks to be limited revenue growth, but I hope the free cashflow profile would support their transition as perpetual revenue strengthens,” said the first buysider.

Additionally, Kofax’s sticky bluechip customer base, made up mainly of insurance companies, government institutions and hospitals, could be conservative and slow to change, giving the business enough time for a gradual transformation, adds the first buysider.

B2B with B2s

Inovie, a returning levfin issuer operating medical laboratories in France, is also in the market, this time with a €400m add-on. The tranche is offered at E+500 bps with a 96-97 OID and like Kofax, is also rated B2. Barclays, Credit Agricole, Natixis, Societe Generale are bookrunners and commitments are due 21 June.

Another step in the company’s viral acquisition strategy, Inovie will use this tranche, as well as €50m in equity from Inovie shareholder biologists and €54m in cash to buy Bioclinic. Moody’s say the business has spent €1.3bn on acquisitions since December 2020.

The ratings agency adds that the business has high Moody’s-adjusted leverage, but is supported by good liquidity consisting of a fully available €175m RCF and €461m in cash on the balance sheet at end of March 2022 — though €218m will be used to finance acquisitions announced in the first quarter, in addition to the €54m for Bioclinic.

Inspired Education also contributed to the wisp of primary for the week, with a €250m term loan B add-on. The non-fungible deal priced at E+450 bps and 97.5, reverse-flexing from E+475 bps and 96.5-97 talk at launch. The new deal still offered significant pick up from the existing TLB facility, which pays E+325 bps and was quoted at 96.75-mid this week.

“The deal went really well,” said a third buysider speaking about the UK-headquartered private school group, “Books were 2.5x oversubscribed and we only got around a 50% allocation.”

Inspired Education received warm reactions due to its position in a defensive and stable sector, and good track record of organic growth combined with M&A.

“It’s not the most exciting credit, but it’s in a good, not shaky sector. The only question we had for the management was why they paid so much for the new portfolio of schools against a quite low EBITDA,” said a fourth buysider.

The €250m of proceeds, combined with €150m of fresh equity, will finance the acquisition of Eleva Educacao in Brazil and a number of bolt-on acquisitions for a total consideration of around €360m. The acquisition is expected to close in June 2022.

Management told lenders they value the Eleva brand highly and would be able to grow EBITDA organically, increasing enrolment with little additional cost. The education sector does not face massive cost inflation, but the company may face some pressure from rising energy bills and wages, pushed particularly by teachers’ unions in several regions. Those are mitigated by an expected 4% tuition fee increase, a reserved assumption given Inspired has historically put through a 5% raise.

The capital structure seemed measured, said three buysiders. The business is marketed off €198m in Adjusted EBITDA for LTM to May 2022, shaking out to 4.6x senior secured leverage and 4.9x total net leverage.

During syndication, documentation tweaks were made around margin ratchets that ended-up with two-step downs of 25 bps at 4.25x and 50 bps at 4x senior secured net leverage. Lenders also gained a margin ratchet holiday of six months as a further concession. The original docs had three step-downs, with starting senior secured leverage at just 4.5x.

The success of the deal has not inspired many other issuers to come to market, however, with many major deals continuing to sit on banks’ books or dip into direct lending.

Amid a general slowing of primary, investors continue to hold fast. Two buysiders said that they had seen no signs of panic trading and that the mood in the market was “measured.” Most agree that any major activity in the primary markets will have to wait until the end of the Summer break.

When asked what prospects awaited primary, a fifth buysider said: “At the moment it feels like it could be the calm before the storm, but that also feels like [saying] it would be sensationalising.”

Leveraged Loans Secondary

Analysts continue to use the quiet period in primary to more closely monitor a hectic earnings season. Since April, a host of loan names have reported, including CobhamWitturLabeyrieCereliaClarios and Solenis.

“Earnings are going okay so far,” said the fifth buysider. “It’s only Q1, but even as they’re guiding toward the full year, everything is standing up. All the storied names are kind of fine, but it will be interesting to see how things progress,” they said.

Several portfolio managers have turned down their focus on industrials businesses, suggesting the top of the construction cycle, in particular, is swiftly nearing. The fifth buysider also noted the effects of food inflation on some sectors.

Nevertheless, the fifth buysider said: “It feels like things are being managed. Nothing has fallen over yet. I think a lot of names have done their cost-savings initiatives from last year and if you’re getting through the Covid-19 period, you’re getting through this.”

A sixth buysider agreed credits were managing the current volatility well but shed doubt on the macroeconomic situation. “The Fed and the Bank of England are in a really precarious position in how they engineer the current situation. It’s possible for them to make a misstep and for everything to go badly. What might help is if some of these supply chain issues were to alleviate.”

They continued: “From the [building materials] issuers I cover there’s very few that are seeing any slowdown. Some of the guys that I cover from the space are way above expectations. It’s a big unknown, things could open up rapidly in the second half.”

Food poisoning

Food inflation has clearly hit the secondary market hard, with the average instrument in the Food Products sector indicated at ~90.

French food producer Labeyrie reported a tasteless first quarter EBITDA of €0.4m on the 18th May, a 96% decline YoY, as it struggled to swallow rising costs. Total net leverage for the first quarter was 5.9x, up 0.3x versus full year. Issued at 99.5 in July 2021, the E+425 bps €455m TLB was last seen indicated at 96.1-mid, moving little despite the poor results.

“I’ve been trying to sell this name for a while and I hear many others are too, but the name just isn’t liquid enough with interested buyers,” said a seventh buysider. The company is struggling with highly cyclical demand for its luxury foods, including foie gras and smoked salmon, often bought during Christmas and Easter. The company is also squeezed by France’s negotiation laws, which only allow food retailers and food producers to negotiate prices once a year in the first quarter, notably just before the Ukraine-Russia conflict broke out this year.

Continuing with the difficulties in France, private label baker Biscuit International posted stale Q1 2022 earnings on 20 May, including a 64% YoY plunge in quarterly EBITDA. Cost inflation continues to weigh heavily on companies in its sector, struggling with paltry grain and oil supplies following the war in Ukraine and exacerbated by limitations on food price negotiations in France. The €205m TLB paying E+400 bps was last seen at 79-mid.

Cerelia, another France-based baked good business, has also suffered, following severe cost inflation and a projected negative cash position, which is expected to reach its lowest point this December. The business has asked lenders for a covenant waiver on its RCF, seeking approvals for an €80m PGE loan with sponsor Ardian expected to step in with freshly baked equity. Its €382.5m TLB is now indicated at 81-mid.

And elsewhere, Signature Foods, the Dutch producer of dips, spreads and side salads that issued a €341m TLB at par in January 2021, has since seen the loan slip to 95.6-mid. At the time of issue, S&P said strong margins from the branded business and a “good track record of operating cost control” could offset raw materials costs. Food inflation in the Netherlands have risen 9.4% in May, according to Trading Economics.

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