LevFin Wrap - Primary parched despite Refresco refresher; Morrisons' struggle for Homes

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LevFin Wrap - Primary parched despite Refresco refresher; Morrisons' struggle for Homes

Huw Simpson's avatar
Laura Thompson's avatar
  1. Huw Simpson
  2. +Laura Thompson
9 min read

High Yield Primary

And so we have it, European High Yield re-opened on Monday with UK-based house builder Miller Homes. Final call 77 days – the longest break since the financial crisis.

Conditions in HY are still far from ideal. Outflows have continued, with Euro focused funds down another -$239m this week, and the iTraxx Crossover widened to 418 bps from 387 bps last Friday. And although Euro HY spreads have dipped below the 5% heights of early March, they’re still close to +150 bps wider than much of 2021.

Miller Homes

An Apollo-sponsored LBO may not have been the pundits choice for re-opening High Yield. But structural undersupply in the UK housing market – currently estimated at over 1m homes – is credit positive for the group, as is an embedded landbank value of £1.9bn as of December 2021. However, slowing GDP is not, with flatlining +0.1% growth in February (including a -0.1% decline in construction) a potential concern.

Together with a sponsor equity contribution of £496.3m (plus management rolled equity of £62.9m), the group offered £815m (equiv.) senior secured notes – split across fixed and floating tranches (B1/B+/BB-) – to fund Apollo’s buyout from Bridgepoint. On LTM EBITDA of £208.4m, this gives an EV/EBITDA multiple of 5.9x, with a valuation of just over £1.2bn.

In an all-secured structure, portability is based on net secured leverage (typically this is net total), and set 0.2x above opening leverage, while an IPO is carved out of the definition of change of control. EBITDA can be adjusted for uncapped cost savings or synergies without a time limit, as well as anticipated run-rate EBITDA from any new project under development and any losses attributable to new projects until 12 months after completion.

From our Credit QuickTake, relative value suggested a coupon somewhere in the Low 7s for the fixed tranche (whispers were also for Low 7s), but IPTs were out at Mid-High 7s and widened to price talk of 8.00%-8.25% yield. The floating tranche also widened slightly, from IPTs of E+525 at 98, to price talk of E+525 at 97-98.

Although books were set to close at 8.30am UKT, final terms arrived on Friday afternoon, with the fixed settling at £425m 7.00% SSNs due 2029 and an impressive 93.45 OID (yield 8.25%). The €465m E+525 due 2028 floating tranche also priced at the wide end of talk, with a 97 OID.

You get more at Morrisons

On Tuesday, Bloomberg reported that lead banks for the Morrisons buyout have sold a £1,200m tranche of Senior Secured Notes – rated BB+ by Fitch. Cap rates on the bonds are set at 5.50%, so the notes have been offered with a discount of 89 – yielding around 8.3%. As we suggest in the Friday Workout, this was unlikely to help pricing for Miller Homes.

Combined with the £1,200m SUNs already placed with CPPIB (6.75% | 93.8), this means the remaining debt to offload includes a £1.7bn (€-equiv.) TLB, £500m TLB, and £500m (€-equiv.) SSN – Bloomberg also reports £500m is expected to move into a TLA, held by banks.

Alongside the Morrisons debt, financing for several other large underwrites may soon land in European HY and leveraged loan markets, including 888-William Hill (latest prospectus here), UnileverIntertrust, and LaLiga.

High Yield Secondary

Not conducive to a re-opening, Secondary dropped -1.0 pts on average this week (11% +0.53 pts | 87% -1.21 pts). Energy proved once again the most resilient, down just -0.61 pts – perhaps aided by rising oil prices, with Brent Crude up +4% on the week to ~$109. Utilities (-1.06 pts), Consumer Discretionary (-1.07 pts), Communication Services (-1.18 pts) and Real Estate (-2.80 pts) all saw sharper declines, driven in part by single names – as some 47 tranches declined more than -3 pts.

Bonds across the Adler complex were again on the move following the release of KPMG Forensics investigation into allegations made by short-seller Viceroy. All the Adler bonds marked double-digit losses, with the 1.5% 2024 SUNs registering weekly decline of ~12 pts. Corestate’s 3.50% 2023 SUNs were down a similar amount, currently in the low 50s. In Chris Haffenden’s piece “More responses than answers”, we dive into key takeaways from the KPMG forensic report. Viceroy’s reply to Adler pulls no punches: “Viceroy doesn't believe there is any amount of qualified opinion or additional language to cover Adler's slimy business practices, ‘unauditable’ books, and complete lack of internal controls.” Read the full response here.

Elsewhere, ATM manufacturer Diebold Nixdorf’s €350m SSNs recorded some weighty moves according to ICE data, down more than -10 pts on the week. There were similar, if less volatile, moves on the $700m SSNs, also down around ten points to the low 90s. News reports emerged of wide-based UK cash machine closures, as some 4,685 high street bank branches have closed since 2015. And perhaps a forward looking indicator, peer NCR Corp announced Q1 earnings on Tuesday, and despite posting a +21% growth in sales, results were well below analyst expectations. CEO Michael Hayford listed high inflation, the Omicron variant and war in Ukraine as significant headwinds – reducing 2022 guidance to $2.70-3.20 diluted EPS from $3.25-3.55.

Swiss direct-selling beauty company Oriflame registered further losses this week on its 2026 fixed and floating notes, down -3.9 pts | -4.8 pts respectively. As reported, already facing a tough start to the year, the group’s troubles compounded on Russia’s decision to halt gas supplies to Poland (after their refusal to pay Gazprom in roubles). This won’t help management’s ambition to relocate much of its production capacity to its Polish site, redistributed from two Russian plants.

Leveraged Loans Primary

Expectations of plenty continue to tease. With no new deals launched this week, buysiders were left asking: “Where is all this primary I was promised? Each week, we’re told to expect this barrage of deals from Monday and it’s just not coming.”

“I worked over the weekend on Refresco expecting loads of deals to launch on Monday,” lamented another, “and it’s crickets.”

Some bright sparks are on the horizon, including add-on deals that are set to come next week, with French healthcare credits (nostalgic) also teased by banks, a third buysider said.

Still, market conditions remain choppy, with French auto supplier Faurecia’s expected financing supporting its Hella acquisition in question after it announced it would wait for more favourable conditions to refi the bridge-to-equity portion of its bridge facilities, set to mature in February 2023.

“I’m not surprised by this. Our outlook on auto has really changed from the end of 2021,” said a fourth buysider. “I wish we weren’t so overweight in some of these names, but here we are. We never expected lockdowns in China [and their impact on the auto supply chain] to come again – look at where they were when we were in the Omicron wave [...] It’s endless – if it’s not China, it’s Europe; if it’s not Europe, it’s Ukraine.”

Nonetheless, with the primary taps a trickle, thirst abounds. For deals that do come to market – such as this week’s sole offering, beverages bottler Refresco, or last week’s Clinigen – they tend to hit general syndication already well anchored at launch and tighten some 25 bps by closing. So far, B2 loans issued this month have tightened from an average price talk of 466 bps and 98.25 OID to 435 bps and 99 OID, according to 9fin data.

Refresco’s €3.4bn-equivalent tri-currency deal is the first of the market’s long-awaited LBO pipeline following last month’s shutdown. For most, it’s an easy one to swallow, insulated by scale, management continuity and a proven track record of M&A. However, soft Q1 2022 results released on Thursday, alongside weak docs, plus questions around interest coverage, the all-senior structure and management transparency, have left others dry.

“You’d pass this easily if it were a new credit, I wouldn’t give it a second thought,” said a fifth buysider, who ultimately turned the deal down. “But because you know the name and you like the name, you want to do it.”

A sixth disagreed: “If only we could click our fingers and pass through immediately. I’m not going to nit-pick this credit. There’s a fundamental growth story here without massive executive risk from the buy-and-build strategy.”

Refresco has today tightened OID on the euro tranche from 98-98.5 to 98.5-99, also pushing commitments on the euro side forward seven hours to 10am Wednesday 4 May, with the dollars moved a day forward to Tuesday. Read a full preview of the deal here.

Refresco skipped on a bonds portion of the deal, with sources close to the deal saying they expected that any secured bonds would ultimately drag wide of the loans. This follows similar chatter around the remaining LBO pipeline, with buysiders wondering whether capital structures planned pre-war would be rejigged to accommodate more loans (at the expense of bonds) and less sterling.

In another spot of activity, Irish waste management firm Beauparc priced its fungible €90m add-on at E+375 bps, equal to the existing €555m 2028 TLB (B1/B), on Monday. At the time of the July 2021 deal, buysiders had been impressed with the company’s track record of acquisition-led growth, now under the wing of a sponsor experienced in a stable, essential sector, as well as high barriers to entry keeping its throne secure, as reported.

Leveraged Loans Secondary

Secondary markets slumped this week as inflation-impacted earnings began to roll through. All sectors tracked by 9fin showed a decline led by Real Estate and Communication Services at -0.5 pts and -0.4 pts respectively. Emblematically, the week’s biggest upward mover (German food packager Kalle) lifted only a pallid +0.9 pts to 87.7 on its €145m 2023 TLB.

“For the Q1 numbers we’ve already seen, performance is mixed along the lines you’d expect — managing cost increases — but we feel there are sectors and credits that haven’t really priced that in yet and that means there are opportunities out there,” said a seventh buysider.

As for backwards sliders, Upfield (Flora) again took the top spot, dropping another -2.1 pts to 91.2 on its 2025 TLB. Still, lenders into Flora remain constructive on the company’s long-term prospects, arguing that in an inflationary environment, what is most important is a company’s ability to pass on costs. Flora’s dominant market share, then, positions them well. S&P downgraded the company to B- on 14 April on expectations it would be unable to achieve previously forecasted deleveraging.

In trading, the loan market remains elevated above HY, with buysiders still attempting to execute loan-to-bond swaps, as they have since the primary shutdown in February. Finding sellers remains a struggle: “There’s three points more on a loan than a bond of the same seniority from the same issuer, but those bondholders aren’t letting go,” said an eighth buysider.  “I sure wouldn’t either. Then again, interest rate hikes aren’t priced into bonds the way they are into loans, so I’m not confident this disparity will last the year.”

Elsewhere, there is an auction of Austrian packager Schur Flexibles supply chain finance debt through Deutsche Bank, with €25m on offer, Bloomberg reported. The company tabled a restructuring plan to lenders on 19 April and is seeking heads of terms by next Friday (6 May), meaning time may be running short, with new money need due at the beginning of June, as reported. The SCF lenders are being asked to roll into the same debt as the SFA lenders. Read 9fin’s Restructuring QuickTake on the situation here or if you are not a client, request a copy here.

French auto supplier Faurecia also announced it had won covenant waivers on its debt, including skipping a leverage covenant test in June and pushing it up to 3.75x (from 3.0x) in December 2022’s test, following volatility resulting from the war in Ukraine. The firm also seeks to suspend dividend payments in 2022.

One lender was tepid on the announcement. “I wouldn't even call it news, it’s such a big company that they can get anything they want – they can say they don’t want any covenants for the rest of their life and they’ll get it,” they said.

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