LevFin Wrap - Paltry Primary Cerves up more floaters, and a bone to PIK with Modulaire
- Ben Hoskin
- +Kat Hidalgo
Lagarde channelling her inner-Powell and delivering the latest hawkish surprise to European markets has seen spreads continue to blow out as credit plays catch up to the drawdown in equities. A frightening 7.5% CPI print (vs. 7.2% exp.) in the US yesterday filtered through to 10-year Bund yields, which continued their ascent into positive territory at just north of 0.2% this morning. Two plucky issuers kept us entertained and braved the market volatility this week - one landed, one didn’t, and a rethink from another in the market saw two deals being pulled on Friday afternoon, both citing market conditions.
Days after ION had pulled a dividend recap citing adverse market conditions, the sponsor was back to syndicate debt backing the LBO of Italian credit research groupCerved. Despite minimal movement from IPTs, reports suggest that the company was pleased with where initial whispers went out during the bookbuild, rewarding the bravery of jumping into a skittish market. “He who dares…”
The €1,400m-equivalent of senior secured debt was first out of the gates on Monday morning, split between 7NC1 SSFRNs and 8NC3 SSNs. The deal was marketed on 4.6x leverage, helped by a cool ~€80m (~28%) of adjustments. Stripping out the punchy addbacks meant that figure jumped to north of 6x, however high barriers to entry, a leading market position and the mission critical nature of its product allowed the deal to progress relatively untroubled.
Covenants were unsurprisingly aggressive, seemingly based on ION’s Cedacri acquisition in May of last year. Uncapped leverage-based RP capacity available day one to the tune of > 1x EBITDA, uncapped EBITDA add backs and day one portability were all flagged in our Legals Quicktake, but perhaps most interesting was the NC1 at 100% (typically 101%) in the FRNs.
IPTs went out on Wednesday at 5.75%-6% and E+525-550 bps on the fixed and floating respectively. Splits came Thursday, heavily skewed towards the floating leg of the financing (€1,050m / €350m), before pricing at the tight end of IPTs for the FRNs and wide end for fixed.
It’s fair to say the week's other issuer, non-performing debt investor AnaCap, fared slightly worse. Despite reducing exposure to Southern Europe and diversifying more into the UK and French markets in recent years, the niche nature of the business saw IPTs sent out at E+675bps with an OID of 98 on its €350m Senior Secured FRNs due 2027, materially wider than initial whispers of 600bp-650bps. That’s a fairly decent step-up on the 500bps they currently pay on the instrument being refinanced, albeit with the existing trading sub-par.
Despite conceding a NC2 period (typically NC1) to attract investor interest, the FRNs were pulled late on Friday due to market conditions, highlighting the growing angst of markets with not even a flavour-of-the-month FRN able to get over the line.
In fairness, there is a chance the decision was more down to the issuer baulking at the rate investors were demanding. They had a solid 2021 and have plenty of time on their hands. The final quarter of FY21 was particularly encouraging, with Adjusted EBITDA of €44.5m versus €13.7m prior year, seeing the LTM figure jumping from €70.6m in Sep-21 to €99.4m Dec-21, mainly attributable to increased collections, which had increased just shy of 50% y-o-y.
UK-based midstream-downstream energy company Prax appeared to be on the cusp of launching its inaugural bond at the end of January, before, as one investor put it, running “headlong into risk off”. One source had suggested a club deal with a juicy double digit coupon was on the table, with enhanced collateral and extra OID, but talks broke down with the deal pulled on Friday moments after AnaCap. Despite the analysis being slightly stale now, 9fin’s Owen Sanderson look at what was going on with the deal prior to the plug being pulled is still well worth a read.
Elsewhere, Covis Pharma succumbed to yet another rejig of its refinancing package, dropping the last of the bond leg that saw $350m-equivalent of EUR SSNs flipped to a first lien term loan at a significant OID.
Indeed, floating rate debt (including loans) as a percentage of total debt in European High Yield and Lev Loans issued from the turn of the year to 11th February is its highest over the last five years.
2019 is a clear outlier in terms of total volume here, the last time tightening financial conditions dented market sentiment, and with bankers reportedly bemoaning weak pipelines it’ll be interesting to see just how much supply dries up from here.
Leveraged loans primary
While there’s still plenty to look at in the market this week, it appears issuers are pausing for a short breath after the sprint that was January. “It feels like there was a lot of issuance slowed down by Omicron last Q4 and now that’s all been done with in January,” said a first buysider.
Only one deal was announced this week, Armor Limak, and notable deals that were expected to come to light in January or early February include Morrison’s.
While buysiders have taken the opportunity to sway choosier, with price talk turning upwards slightly, and docs pushback garnering some changes, those CLOs still need to be filled.
Some issuers are taking advantage of the relative quiet to bring add-ons, and in the case of Cerba, for yet another acquisition. Following its acquisition of Italian Lifebrain, the French labs conglomerate is now pulling a triple acquisition, with the support of a €650m TLB. The business is expanding in France and the Netherlands with the acquisition of Project Milk, Viroclinics and Labexa.
Mad for add-ons
Price talk for the Cerba add-on sits at E+400 bps with a 99.5 OID, while its €350m add-on for the October acquisition of Lifebrain priced at E+375 bps with a 99.75 OID. This is perhaps reflective of buysiders’ view of weaker Covid-19 tail winds on the sector, though the business has removed a €250m Covid-19 benefit; however, this can still be used when calculating leverage ratios, which means two leveraged ratchets would kick in after a six-month ratchet holiday, pursuant to the October OM, according to a second buysider. This would also affect the October add-on, meaning the margin would drop down to E+325 bps in around April.
The buysider questioned whether the business had room to grow in a consolidated market, despite strong fundamentals.
Solera, a US issuer now known as Polaris, which borrowed €1.2bn in June 2021, pushed another acquisition through the market this week. The Vista-owned business is acquiring Spireon, a North American telematics business, using a $300m add-on, $338m in equity and $100m drawn from the company’s $500m RCF, according to Moody’s.
Yet another add-on, this one stoking disquiet on the buyside, is Modulaire’s €250m TLB, which will be used partially to repay a previously undisclosed Holdco PIK.
“It’s an offensively timed transaction made worse by not disclosing the Holdco PIK [in the original financing],” said a third buysider. “I’m viewing this as essentially a divi recap.” The complaints from buysiders overshadows some positivity towards the credit itself after successful deleveraging and growth in its leasing and value-added product and services (VAPS) revenues.
The PIK was raised as part of Brookfield’s buyout, a €185m deferred consideration to former owner TDR Capital which was then crystallised as a PIK. Alongside €124m of cash from the balance sheet, the add-on will also repay €109m of revolving credit facility (RCF), as well as fund €78m towards signed M&A and €3m of fees and expenses. See our loan preview here.
In one of two straightforward LBOs currently in syndication, Altadia, a Spanish tiles coating manufacturer, is raising €1.2bn to support its €1.9bn acquisition by Carlyle.
Under the ownership of Lone Star, the business’ dividend recap in July was looked kindly upon by investors with the OID tightening from 98.75 to settle at 99.75. Leverage for the latest deal will be significantly higher than 4.2x following the dividend recap at 5x based off adjusted EBITDA, jumping to 5.8x off unadjusted EBITDA, leading the fourth buysider to decline the deal this time around. “It’s a great business,” they said, “the capital structure is just inappropriate.”
The second, Armor-Linak, is slightly more strangely structured, with Astorg taking 40% of the business and management taking the remainder. Deals that favour minority investments have become more common in France, but while ratings are yet to be announced, we’ll have to wait to hear what the official stance is on how aggressive the company will be on leverage.
The two LBOs that were priced this week had fairly positive reception. ITP Aero’s $666.7m TLB priced tight of guidance on its margin and OID. Bain is acquiring the business for €1.9bn from troubled Rolls Royce and the business will have to focus on narrowbody travel, as the longer term trends move away from widebody travel with a slower recovery as it moves forward. Commitments were also accelerated by a day, and no doc changes were achieved, despite them being called “brutal” by sources.
Brazilian PE firm 3G Capital acquired Dutch window coverings producer Hunter Douglas for $7.1bn and at a 70% premium to its unaffected share price and with a $3.1bn equity cheque, this deal was not holding back. A chunky valuation and declining Covid-19 tailwinds on the sector were fox holes but buysiders were kept interested by a superior market position, good historical cashflow and fair pricing, relative to its rating.
Despite healthier pricing on the euros, the first buysider was more concerned about the success of the US tranche: “It’s just very big and you need the market there. You don’t want people dropping too much, and on the USD tranche you need good consensus that this is a good transaction.” But counter to this buysider’s concerns, the euro tranche priced at the wide end of guidance, while the dollar tranche priced tight. See our loan preview here.
While buysiders have bifurcated somewhat in recent weeks to rely on stable businesses in light of inflation and volatility in the market, healthcare is not providing that haven this week. First up, we have Covis Pharma, which is now testing the loans market after $475m and €375m in SSNs were pulled.
Buysiders told 9fin the steep 93.0 OID cited in price talk isn’t even worth taking the fall for this credit, with some going so far as to say this deal should not have been brought to the leveraged finance market, due to its product concentration. The deal is now offering a 90 OID, according to LPC.
Cheplapharm’s €1.48bn was also anything but a soothing deal in the market this week. Amid a rushed switch from an IPO deal to a loan deal, buysiders described a lender presentation as “ill-fitting” and “unprepared”, while multiple accounts told 9fin they have been requesting additional information on the planned acquisitions, preferring not to write a blank check.
The capital structure is straightforward, but omits the net cap and equity cushion to lenders in a similar fashion to other recently priced deals. However, based on the IPO valuation, the cushion appears healthy. Cheplapharm’s refi is marketed off €777m of adjusted LTM September 2021 EBITDA, up from €574m of reported EBITDA. The marketed figure is helped by a €98m addback for acquisitions that closed post September and a further €105m of earnings benefit from four product portfolios that the company plans to acquire. See our loan preview here.
High Yield Secondary
Away from a brutal primary market, just one bond (PHM Group) issued year-to-date currently trades at a premium in secondary. Weak sentiment is supported by ICE BofA EHY index, where spreads are out to 371bps, a far cry from Sep-21 lows and back to levels last seen early Nov-20.
The bleeding wasn’t contained to spreads, with Euro High Yield funds recording a mammoth $1,216m outflow this week, with global high-yield funds having shed 2.1% of AUM YTD - the worst start to the year since 2018.
Healthcare (-0.61pts) led the way down this week, with IT (-0.48pts) and Communication Services (-0.46pts) in pursuit. The one sector in the green, Energy (+0.16pts) owes the outperformance to the rout in Saipem paper last week, which recovered some of its prior losses this week.
Within sectors, the only reason Healthcare Equipment (-0.70pts) and Automotive Manufacturers (-0.62pts) weren’t the worst performers of the week owed to continued softness in Seche Environnement bonds, dropping from par in mid-Jan to the low-90s and dragging Environmental Services down -0.81pts. With a low coupon (2.25%), a 2028 maturity and a lack of newsflow to suggest anything more sinister at play, this is likely explained by high convexity, with the debt now paying low 3s.
Leveraged Loans Secondary
Despite investors’ hankering for floating rate instruments, all industries in leveraged loans secondary this week were in the red, though admittedly, all by less than a point. “There’s opportunities starting to show in the secondary market,” said a fifth buysider. “It’s been flat for a long time but you’re starting to see some shake up.”
Not surprisingly following the accusations against French care home providers Korian and Orpea, our two biggest fallers were Colisee and DomusVi. Three of the latter’s TLBs fell between 1.586 and 1.672 pts this week. The most affected was the business’ €150m TLB paying E+300 bps, now indicated at 96.875. Colisee’ €150m and €875m TLBs each fell 1.347-pts to sit at 98.5.
Two accounts are reviewing their positions in Colisee and DomusVi based on these allegations, with the fourth buysider suggesting the best course of action was to sell. DomusVi could potentially be involved in a documentary to come out in a few months and the fourth buysider was also fearful of potential investigations and regulatory change in the sector.
Upward movers were fewer and farther between this week, with the highest ascent being PlusServer’s TLBs moving upwards just one point, albeit from distressed levels, to sit at 41.5.
The German company provides cloud services and solutions, however a sixth buysider has previously told 9fin part of its business has been “completely killed off” by Amazon: “There’s no expectation they can recover those revenues,” they said, adding that they’d be surprised to hear of any trading on this name.