Market Wrap

LevFin Wrap - Luft off for FRNs as Inflation gets graphic

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High Yield Primary

In a quiet week for primary, just three new deals hit the wires. Instead it’s been all about Macro, with UK GDP figures failing to impress, and price increases making headlines across the globe. Rising energy costs continue to drive US inflation, so much that President Biden sees this as priority number one. The scary October CPI print from across the pond put US YoY CPI at 6.2% - which marks its highest level since 1990 - already building on 5.4% seen in September.

Jerrold’s Back

Returning for the second time in as many months, Monday saw specialist mortgage and secured loan provider Together announce a £100m tap of its existing 4.875% Senior Secured Notes due 2026 (BB-/BB-). Less racy than October’s £380m 6.75% / 7.50% Senior PIK Toggles, the additional notes will repay a £50m RCF draw, with the remainder for general corporate purposes. Pricing same-day, the fungible notes upsized to £120m (+£20m for further GCP) and landed at 100.5, tightening on 100.0-100.25 IPTs.


The flag carrier for Germany, Lufthansa has dipped into HY three times this year, and with this issuance brings the total to more than €4bn. Given a sluggish start to the year, S&P notes that 2021 demand is still expected at 30% of pre-pandemic levels, although 2022 should see this recover to 70%. The rating agency updated its outlook to stable from negative on Monday - just in time for the new deal. Tranches upsized from €500m to €600m on the 2023 leg, and stretched further - from €750m to €900m - on the long-haul 2027 leg. Final terms were 1.625% and 3.00% respectively, the tight end of IPTs. 

Third quarter results announced earlier this month saw revenues almost double YoY, even managing to post slight positive adjusted free cash flow of €13m. Chief executive Carsten Spohr said “we are back to black… now it is a question of continuing on the path of successful change”.

Wood for the Trees

And finally, US-headquartered paper-packaging group Graphic Packaging wrapped up the acquisition funding for Sweden-based AR Packaging - a move which will increase its presence in Europe and capture a growing trend toward sustainability. There is however more than meets the eye when it comes to paper-based packaging as a sustainable alternative to plastics. Although trees are by nature renewable, not all forests are equal. New plantations may not make up for the felling of old growth forest, which tends to be more carbon rich, and carbon payback of new forest ranges from 20 years to “sometimes centuries”. To learn more about trees, read our ESG QuickTake here.

The group boasts of its vertical integration (it supplies paperboard from mills to the packaging segment), allowing for greater margins vs. peers, and clients include Coca-Cola, Kraft Heinz, Nestlé and McDonalds. Combined pro forma revenues are $8,066m, and EBITDA of $1,268m for the LTM period ending 30 September 2021.

Launching €290m and $400m of Senior Notes due 2029, proceeds from the offering will repay borrowings under the revolver and the incremental term loan used to finance the acquisition. As with Lufthansa, final pricing landed at the tight end of IPTs, for 2.625% on the Euros and 3.75% on the Dollars. 

Long Term Transitory 

9fin editor Chris Haffenden points to the ongoing hot topic in this week’s Friday Workout - namely the scary October US CPI print of 6.2%. In the euro area inflation was at 2.8% in the third quarter, rising sharply to 4.1% in October - a rate matched only once since data was first published in 1997. Yesterday’s (11 November) Autumn 2021 Economic Forecast produced by the European Commission suggests the pick-up is mainly driven by energy prices, and as such believes the current levels are “largely transitory”. 

As a former - quite mediocre - student of Economics, I’ll shy away from any predictions, but we can take a moment to look at a recent trend in High Yield:

There appears to be a nice correlation between FRN issuance and inflation, although the recent price level jump far outpaces (the admittedly increasing) floating rate volumes, so there may yet be some lag effect. However, total volumes of EUR-GBP Senior Secured FRNs have already topped more than €10bn in 2021 YTD, versus just €5.4bn in 2020, and €7.7bn in 2019.

Logically, floating rate instruments allow the bearer to benefit from any increase in the underlying benchmark, which is in turn governed by the applicable base-rate. In a world of increasing inflation, any observer who views the increase in price levels as non-transitory should expect some form of central bank tightening - felt either through the more immediate effects of a reduction in QE, or from a rise in rates.

From an investors perspective, there are a lot of factors at play, but some initial thoughts include;

  • Potential for relative value trades. If we ignore any specific fund mandates for the type of security you invest in, should you pivot to FRNs if you expect greater demand given they offer an interest rate hedge?
  • Call structure limitations could be mitigated. You might argue that due to the usual NC1-101 structure, there could be a short-lived benefit for any well-performing credits. However, some recent FRN deals have greater call protection (e.g. Encore Capital’s NC2 2028s)
  • Other benefits of FRNs. Alongside lower interest rate sensitivity (duration) risk, FRNs have historically seen lower volatility, and benefit CLO demand.

However, some of this impact may have already been priced in - the average price move YTD on floating rate secured EUR bonds has been around +2.79 pts, while for fixed rate notes it's just +0.65 pts.

High Yield Secondary

After making some gains last week Secondary names retraced slightly, softening -0.06 pts on average (49% +0.28 pts | 48% -0.40 pts). Consumer Staples (-0.11 pts), IT (-0.15 pts), Communication Services (-0.16 pts) and Healthcare (-0.32 pts) were the worst performers, the latter driven by further softening across the Valent capital stack.

Consumer Discretionary made the only overall positive move, trading up just +0.04 pts. Selecta 2nd Lien 2026s gained +1.7 pts, posting Q3 results on Wednesday with EBITDA +75.6% YoY, and leverage dropping to 7.2x. Sales are still impacted by work-from-home policies, however gradual pick-up means sales are up to 76.3% of 2019 levels.

Across fund flows, BofA Global Research shows Global HY (+$655m) and Euro HY (+$212m) saw inflows, while US HY (-$105m) suffered an outflow. While US focused funds have captured most of the inflows to date this year, globally focused funds have outperformed lately.

Meanwhile, the iTraxx Europe Crossover was fairly steady on the week, tightening by around a point to 247 bps.

Leveraged Loans Primary

The leveraged loan market stayed sleepy this week, with just two new issuances to distract buysiders from earnings season.

“It’s definitely a pleasantly quiet time in the market,” said one buysider. “T-Mobile was even brought forward to take advantage of this lull where there isn’t much competition.” By contrast, Morrisons will likely only come to market by mid-December, LPC reported, with leads wanting to close the deal this calendar year ahead of any increased jitters in the wider financial markets.

One of these new issues, unfortunately for buysiders, is for the most part a repricing. US-based retail and consumer marketing services firm NielsenIQ is the returner, seeking to reprice its €545m and $945m TLBs and top up with a slim €150m fungible add-on. The company priced these loans first in February this year at L/E+400 bps and a 99.5 OID. “Nothing exciting here,” admitted a second buysider.

The whole package

The market’s fresh face this week is Germany-based Syntegon, a processing and packaging company for the pharma and food industries. The company’s €1.03bn 2028 TLB (B2) will fund a divi recap feast for sponsor CVC Capital Partners, who acquired Syntegon from Robert Bosch only last year, as well as refinance an existing PIK facility. 

The deal currently guides at L/E+350-375 bps and 99.5, with the euro tranche at approximately €300m. Alongside is a €150m guaranteed senior secured RCF and a €175m guaranteed senior secured guarantee facility.

Buysiders may struggle in their own processing of this company, given Syntegon’s audited financials only go back one year. For its part, Moody’s writes that the company is catching up with peers’ profitability after historical lags, with a plan to clock in €237m in net savings by 2025 also underway. 

Apex creditor

Elsewhere, fund administration services provider Apex Group wrapped up its dual currency add on (B2/B-/B) this week. The Genstar-backed company, whose customers include asset managers and family offices, is purchasing specialist fund services provider Sanne Group

After a few weeks where a number of deals won only tepid reactions, buysiders (particularly European ones) were clearly keen on this credit. Despite commitments being brought a day forward, the company screwed in the euro OID tighter to 99.75 from 99.25-99.5, while also upsizing its €225m tranche to €310m. 

“It was a fairly easy one to look at and a company we’ve invested in before,” said a third buysider. “I’m pleased with the purchase: Sanne was a competitor for Apex, so this is positive, and yeah it will put the leverage up, but it’s to further growth and there’s nearly $1bn equity being put in too.”

The $465m tranche is unchanged, with final OID at 99.5 from 99.0-99.5. Euro margins closed at E+400 bps and dollar margins at L+375 bps, both in line with the original loans issued in July.

Those July loans comprised $900m at L+375 bps and 99.5 and $512m-equiv of euros at E+400 bps and 99.5, plus a $275m pre-placed second lien facility. A pre-placed $180m incremental second lien TL also supports the acquisition.

Median makes it

Finally, a month after commitments, Median Klinken has priced it's €500m tranche at E+500 bps and 97 OID. This is at the wide end of initial guidance of E+475-500 bps, with buysiders instead pricing post-documentary risk into the OID, as previously reported, knocking two pts down from talk of 99 OID. The €300m equivalent sterling tranche, meanwhile, has been postponed. 

The company, set to merge with Priory under Dutch private equity firm Waterland, initially brought an €800m-equivalent sterling/euro loan to market at the beginning of October, however commitments were delayed upon news of the upcoming ITV documentary. Buysiders largely shrugged off the doc, which aired on 25 October, which depicted only one hospital facility and did not represent a wider ESG risk, they argued.

Missiles, mixtures, mobiles

Buysiders continue to debate the ESG snags of defense firm Ultra Electronics ahead of 16 November commitments. The company and sector appear strong to those considering the deal, however buysiders are stuck on how their investors might receive the company’s direct and indirect weapons-based revenue.

The second buysider said: “We have agreements with our CLO investors that we won’t do anything with weapons. If we’re asked, we could argue that it’s not directly weaponry, but they can very rightly say that that is nitpicking. This is a company profiting from weaponry and from war. That conversation could be very damaging for our relationship, so we decided to err on the side of caution and put this in our loans listed account instead.”

Many shops are, however, looking at Ultra out of their US offices, where ESG takes a lower priority, buysiders admit. US analysts are also partly taking chemicals business Kraton, still in the market with its $750m / €300m TLB. The synthetic rubber manufacturer is offering a conservative capital structure leaving the business less than 4x levered with a close to 60% equity cheque, but buysiders are worried about a changing management team and ailing EBITDA margins.

The final deal in the market, T Mobile Netherlands, is the largest at €2bn and current price talk of E+400 bps and 99.5 OID, with bonds coming after loan commitments on 18 November, buysiders report. “This is a big one we’ve all been waiting for, this and Morrisons, people have been hungry for a big LBO,” said the third buysider. “It will sail through.” Funds support an LBO by Apax and Warburg Pincus.

Request a Loan Legal QuickTake on NielsenIQ, Syntegon, T Mobile Netherlands, Kraton and Ultra Electronics by emailing, attaching your copy of the draft Term Sheet / SFA so that we can validate you have access to the documentation.

Leveraged Loans Secondary

Two names who came to market earlier this year, Netherlands pharma firm Organon and UK payment-processor Paysafe, took a battering in their results this week. 

Organon, which specialises in women’s health, such as the contraceptive implant, reported a 25% drop in quarterly EBITDA from $721m to $539m, adjusted to a more palatable $636m on the back of one-time costs, stock-based compensation and acquired in-process R&D.

“The results didn’t really bother me,” admitted a fourth buysider. “The demand for birth control isn’t going to go away. Even with the high-profile concerns around blood clots for the vaccines, people don’t care that the risk is 100 times worse for birth control.”

When the company came to market in April, buysiders described a global presence and strong brand-recognition in its blockbuster contraceptive Nexplanon, however noted that many of its core financial metrics were declining pre-deal as it struggled to cope with loss of exclusivity after a number of patent expiries.

As of today (12 November), Organon’s €750m E+300 bps 2028 TLB (Ba2/BB) remains trading above par, per 9fin data:

Paysafe, meanwhile, is looking like less of a safe play that some buysiders thought back in June. Despite long-term trends towards online payments, the company clocked in a net loss of $147.2m for Q3 (versus $38.1m), including a non-cash impairment charge of $322.2m. CEO Philip McHugh acknowledged “softer than expected revenue, reflecting both market and performance challenges within the digital wallet business.”

“Stock is down 40% but the loans are only down 2%,” said the second buysider. “That’s a bigger discrepancy than just accounting for loans having security, being less liquid, all the usual stuff. I’m wondering if something else is going on here.”

Paysafe’s €275m E+300 bps 2028 TLB (B1/B+) is trading at 98.2 pts.

Zooming out, the past two months’ trend of continual softening has somewhat reversed. Around 80% of sectors tracked by 9fin showed week-on-week average price uplifts, albeit minimally. Notable outlier Communications Infrastructure was dragged down by long-suffering PlusServer: its €190m and €70m tranches, maturing in 2024 and paying E+375 bps, each dropped -6.7 pts this week to 41.3 pts.


LevFin Wrap is published weekly for subscribers and includes our Forward Pipeline. If you would like to receive a copy of the Forward Pipeline, please sign up here.


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