Market Wrap

LevFin Wrap - Roaming the Spectrum

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  1. Huw Simpson
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Telecoms companies have historically supplied a significant proportion of the European High Yield market. Aside from regular refinancing transactions, new debt fueled LBOs, take-privates and acquisitions made Communication Services a bumper sector for new issuance in 2021, a trend that’s continuing into 2022. 

High Yield Primary

High Yield markets closed out 2021 with the bond leg of T-Mobile Netherlands’ LBO, and have now reopened with Dutch rival VodafoneZiggo’s (VFZ) refi transaction. Launching €2.1bn (equiv.) in sustainability-linked Senior Secured Notes due 2032 (B1/B+/BB), the deal marks the first SLB in the European HY telecoms sector. 

The sustainability-linked mechanism includes two 0.125% interest rate step-ups from July 2026, conditional on whether certain SPTs are met by December 2025. Targets are linked to a 50% reduction in GHG emissions by 2025 (2018 baseline) for (i) Scope 1 and 2, and (ii) Scope 3 emissions. In addition, the make-whole and call schedule redemption prices will be subject to a ‘redemption adjustment’ depending on whether the SPTs have been met (+/- 12.5 bps if neither/both are met). Ever-innovating, the structure brings a novel element to HY, the -12.5 bps reduction in redemption prices. 

As we cover in our ESG QuickTake, VFZ’s green credentials appear sound – the group has an existing green bond framework, is carbon neutral (although use of offsetting and wind power certificates is questionable), and the targets set are science-based. However, these are limited to GHG emissions, and fail to include other social SPTs, such as those employed by parent group Vodafone, which aimed to have 40% of women in management and senior leadership roles. At present, women in management make up just 29% – so, maintaining Vodafone Group’s SPTs at the JV would have probably have demonstrated greater commitment to sustainability.

Offering benchmark tranches in EUR and USD, on Wednesday IPTs were sent out in the 3.50% and 5.00% area respectively. The release of hawkish Fed minutes did little to ease the bookbuild, and price talk was unmoved on Thursday. Final pricing later in the day held firm on the €750m tranche at 3.50% (par), while the chunky $1,525m tranche widened, pricing at 99.03 with a 5.00% coupon to yield 5.125%. Proceeds will redeem the existing $1,600m 5.50% SSNs and €620m 4.25% SSNs due 2027.

Compared to existing trades, the VFZs secureds (due 2030) are currently yielding around 3.1% and 4.8% respectively (mid), suggesting a modest pick up for the new notes, alongside the increased duration. T-Mobile Netherlands EUR secureds are yielding 3.5%. 

Elsewhere, given the issuer, broader covenants were unlikely to see any pushback, but you can read these in full, including the presence of ‘creeper lists’ in our Legals QuickTake.

Network opportunities

As mentioned, there was no shortage of Telco deals in 2021 – we tracked twelve – including the Iliad buy-out, Masmovil’s acquisition of Euskaltel, and of course T-Mobile Netherlands. 

For 2022 we’re expecting further supply from KKR’s jumbo €33bn buyout of Telecom Italia, although this is still subject to a possible ‘golden-power’ block from the Italian state, and resistance by shareholder Vivendi (latest update here). On 22 December 2021, the European Commission approved the acquisition of Wind Hellas by United Group (we looked at a possible post-transaction capital structure back in August), which will be combined with Nova, with the transaction expected to complete this month.

The presence of Patrick Drahi also looms over BT, whose Altice UK Sarl entity increased its shareholding in BT from 12.1% to 18% last month, representing an additional £1bn investment above the £2.2bn paid for the original stake. Although speculation remains endemic, Altice UK has declared that it will not make a takeover bid in the next six months, unless there was an agreement with the board, or rival bid. 9fin’s Caitlin Carey investigated the capacity available under Altice International’s covenants to send further cash to Altice UK – a €250m loan has already been made, with further loans expected.

Earlier this week, Reuters ‘breakingviews’ suggested another Dutch groupKPN could be the next target for buyout firms. With a market capitalization of ~€11.6bn, the group is well within the reach of leveraged financing packages.

Leveraged Loans Primary

A 9fin welcome to 2022. Fresh from 2021’s record-breaking euro leveraged loan volumes, issuance only trickled out the gates this week: just two add-ons (Iris Software and Biscuit International) and a €1.43bn TLB (Ceramtec) came to put an end to the festive fun. 

Despite this slow start, buyside and sellside sources alike predict a busy January driven by recaps and M&A deals, albeit lighter than 2021’s January, when €6.4bn of euro-denominated lev loans launched. (Read our 2021 wrap and 2022 outlook for leveraged loans here.)

Explaining this initial week of calm, some companies are waiting in the wings for the long-anticipated Morrisons deal to clear the market, according to one sellsider. “If the market is receptive, then they’ll come; if not, they’ll hold back. Morrisons will be the deal that sets the tone for the year.” The supermarket is waiting on (hopefully) bumper Christmas numbers to issue, buysiders report.

Following that deal, two buysiders flagged “a number of'' M&A deals, whose issuers had the luxury of flexibility, pushed back to Q1 from early December, with discussions to refi 2024 and 2025 maturities also underway. M&A processes started in late Q3 and Q4, however, are still ticking along for Q1 closings, with financings to launch soon after, the sellside adds. 

Other expectations for Q1 launches include a rash of refis from Covid-winning industries, such as Building Materials and Healthcare. German software firm Autoform and True Potential (following its September 2021 purchase by Cinven) are also upcoming issuers, buysiders report.

But for now, it was a slim £75m 2025 add-on from UK accountancy software firm Iris that started off the year. Guided at S+450 bps and fungible with a $445m TLB issued in July 2018, commitments are on 13 January. Funds repay RCF drawings and bolster cash on the balance sheet.

Meanwhile, the charmingly named Biscuits International - whose objective is to “help address and provide solutions to [the] demands of the European biscuit market” - is out with a €205m add-on to fund its acquisition of Continental Bakeries. Price talk is E+400 bps and commitments are due on 21 January.

Hip to be ceramic

Speciality ceramics manufacturer Ceramtec then saved the week by launching a €1.43bn TLB due 2030 (B2/B) to support its acquisition by BC Partners and CPP Investments and refi existing debt. Alongside is a 6.5-year €250m RCF. Commitments are 19 January.

Founded in 1903, the company manufacturers ceramic products for medical and industrial end markets, including hip and knee replacements. A Moody’s review in December 2021 flags high leverage, although the company has been deleveraging through 2021 from a high 6.4x in Q1 following a €50m loan backing its acquisition of Dental Point and a €175m nominal syndicated loan paying E+250 bps in Q4 2020. Instead, management in their report gave Q3 2021 leverage of 5.2x (3.6x senior net) on €256.5m of LTM adjusted EBITDA and €1.335bn net debt, including €276m of cash.

This deleveraging was bolstered by a “post”-pandemic recovery, with medical sales leading as hospitals worked through delayed non-emergency procedures. The segment revenues were up 22% YoY as of Q3 2021, while industrials - which includes machinery, automotive and electronics - increased by 15%.

The ratings agency tempered the company’s leverage with its leading position in hip replacements; its geographical diversification through Europe, Asia and the US; as well as strong profitability, while flagging exposure to the cyclical industrial end market.

High Yield Secondary

Instruments traded down marginally this week, losing -0.14 pts on average (42% +0.38 pts | 56% -0.54 pts). By industry, Real Estate (+0.31 pts) benefitted from further gains across the wider Adler complex, a +6 pt related gain for Aggregate’s SUNs due 2024, and +2.4 pts for SIGNA’s 2026s. Energy was up +0.21 pts, with Raffinerie Heidie 2022s +3.8 pts to 95.1 – a Q1 refinancing is reportedly in the pipes, with Credit Suisse hired as bookrunner.

Across Industrials (+0.13 pts), familiar faces in the transport and logistics sector saw meaningful improvements. TAP Air 2024s rose +4.7 pts to around 95, building on a recovery from the low 80s throughout December, on receipt of state aid approval from the European Commision. Both IAG (+2.7 pts), and Lufthansa (+1.7 pts) recovered across their debt stacks, and TUI Cruises managed a +1.6 pts gain – to float above par for the first time since Q3 results in late November.

Given the rates backdrop, within Communication Services (-0.35 pts), there was softening across the majority of Telco names, including VMED-O2 and Zayo down -1.0 pts on average, and Virgin Media -0.80 pts. Similarly, Altice France and Altice International were down an average of -0.7 pts across their twenty-one instruments.

In fund flows, Bank of America Global/EPRA Research reports US and Euro focused High Yield funds showing healthy inflows – $293m and $428m respectively. Global-focused funds meanwhile saw outflows of -$30m. The iTraxx Crossover started the week at 242 bps, tightening in a couple of points by Wednesday morning before widening to 250 bps by Friday.

Leveraged Loans Secondary

To catch up after a month of rest, the biggest monthly secondary moves in leveraged loans were as follows:

Many of these names are unsurprising. GTT Communications continues to rise after a Bankruptcy Court for the Southern District of New York approved the company’s prepackaged restructuring plan at the tail end of 2021. 

Vue has been another perpetual riser through 2021. One buysider, who traded out of Cineworld in early 2020 on pandemic closures, admitted to bafflement:  “What I don’t agree with is people who are looking on Vue much more favourably than Cineworld, that I don’t understand,” they said. 

Cineworld’s own fortunes slumped at the end of 2021 after it lost a lawsuit with Cineplex. Cineplex sued the world’s second largest cinema operator for breach of contract when it walked away from a merger in May 2020, with a Canadian court ruling that Cineworld now needs to pay a hefty $930m in damages. The company has plans to appeal and leisure analysts are “mostly” confident it will be successful.

In more recent news, Germany-headquartered plastics packaging firm PACCOR’s loans jumped +4.4 pts on news it would be acquired by Danish Faerch Group in H1 2022. US sponsor Lindsay Goldberg will retain ownership of PACCOR’s UK business.


9fin's LevFin Wrap is published weekly and includes our Forward Pipeline for subscribers. If you would like to request a copy of our Forward Pipeline, please complete your details here.

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