LevFin Wrap - Short of Breath

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LevFin Wrap - Short of Breath

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Michal Skypala's avatar
  1. Huw Simpson
  2. +Michal Skypala

High Yield Primary

And it begins. Six new deals have launched, while eDreams and Ceramtec rolled over from initial marketing last week. Supply ranges across both ratings and industry, and although some credits managed tightening in the later stages of the bookbuild, overall impressions were mixed.

A royal residence?

In the grounds of Kensington Palace, Wren House sits at the edge of leafy Hyde Park, London – it’s been the home of Prince Edward, Duke of Kent since the late 1970s. Oddly then, it’s also the name of an infrastructure investment firm, owned and fully funded by KIA, sovereign wealth fund of the State of Kuwait – and new owner of Voyage Care.

Wren House (and rollover management) completed the acquisition last week, offering equity of £330m for the business – on an 11.8x EV/EBITDA multiple including debt – taking ownership from Partners Group and Duke Street. Offering £250m Senior Secured Notes due 2027 (B2/B+) the UK-based provider of residential care homes is refinancing its existing 2023 SSNs and expensive 2nd Lien Notes. The business benefits from a strong freehold property base (£436m property value), long customer relationships, and fee increases to partially offset inflation. There’s also value accretion – through bolt on acquisitions at lower multiples. However, the majority of revenues (96% in FY 2021) rely on public funding via local authorities and clinical commissioning groups, so government budgets play an important role. Given the fallout surrounding party-gate, how might a new, left-leaning government change the funding dynamic?

Legals were generally conserative, although one-time portability is set 0.5x below opening leverage. Pricing failed to tighten on IPTs in the high 5s, and the notes launched at 5.875% for par.

Not a Voyage Care residence…

Further Sterling supply was offered by Zenith Leasedrive – who priced £475m 6.50% Senior Secured Green Notes due 2027 (B1/B+) to refinance existing debt and for general corporate purposes. An amount equal to the proceeds will be used to fund projects that reduce GHG emissions from road transportation.

Provider of ‘Mobility-as-a-service’, Zenith leases vehicles, with 150,000 vehicles under management as of 30 September 2021. The group holds nearly £700m in drawn securitisation facilities (secured against the fleet) – and had a further £255.8m available under these facilities. The new notes do not have security over the fleet collateral, and are effectively subordinated to the securitisation debt.

Holding to the green theme, Webuild (formerly Salini Impregilo) announced a €400m Senior SLB due 2026 (BB-/BB), which targets a 50% reduction in Scope 1 & 2 carbon emissions by 2025. It’s worth noting the SPT excludes Scope 3, which represents 80% of emissions. Governance may also attract attention, with the details of legal proceedings running to 12 pages in the OM – covered in our ESG QuickTake

The new financing will increase the group's share of fixed corporate debt to 85%, while extending the average maturity by nearly four years. Pricing at 3.875%, the deal marks a 200 bps reduction on SUNs issued in January 2021.

Feraheme fears

Among several strong contenders, Covis Pharma may well top the list for bringing the most interesting deal of the week. Acquired by Apollo in March 2020, the group sells branded pharmaceuticals, with a focus on Respiratory (52% sales) and Hospital & Critical Care (45%) segments. Asset-lite – with limited or no capex and working capital requirements – the business has historically been highly cash generative, with conversion rates close to 100%. 

However, near-term patent expiries for two key products, Feraheme (US – expires 2023), and Alvesco (EU – 2024) could be a cause for concern. Feraheme in particular makes up 28.9% of revenues, and has competition from generic version ‘Sandoz’, this has led to a 33% loss in market share, and prices lowered by 30% in order to compete. Adding to this, in 2019 the US FDA proposed a withdrawal of Covis’ premature-birth drug Makena, which itself contributes 15% of group revenues, questioning its efficacy. Developments from the FDA have been slow, and Moody’s suggests alternative treatments are very limited, which might allay some fears on this front.

Our Legals QuickTake is well worth a read. We see significant scope for value leakage, including via a clause for uncapped permitted investments so long as leverage does not deteriorate – also of interest is the presence of a weak J.Crew style blocker.

Offering $475m and €375m SSNs due 2027 (B2/B), it looks as though you’re being rewarded for risk, as IPTs were last seen in the 7.50% area (USD) and 7.00% area (EUR). Books close on the 26th January.

Sweet dreams

Elsewhere, online travel agent eDreams ODIGEO issued €375m Senior Secured Notes due 2027 (Caa1/CCC+/B-), helped along by a €75m equity injection placed last week. Proceeds from the new funding will redeem the existing 2023s, and support the group in accelerating its new “Prime” travel subscription service. Prime members – who benefit from discounts, special deals and priority service – have grown from 450,000 in the summer of 2019, to over 2.2m at the end of 2021. eDreams view subscriber booking as stickier, and expects these customers to make up two thirds of all bookings by 2025.

But, as a cyclical business, revenues dropped when holiday bookings were postponed and cancelled during the pandemic. As you can see above, there’s still some to go before a return to business as usual. However, as one buysider points out “If I wait for a proper recovery on this one, I’ve missed the bus.” Pricing reflected this, managing to land at the tight end of talk for 5.50% – not bad for a travel agent with a Sep-2021 LTM Cash EBITDA of €3m. 

In other names:

  • Autostrade Italia – the motorway concessionaire, priced €1bn across two €500m SUN tranches, with the six-years paying 1.625% (99.4), and the ten-years 2.250% (99.0). Atlantia’s disposal of the group to a consortium led by CDP is near completion, and together with a settlement agreement, should resolve the dispute with the Italian government after the Genoa bridge collapse in August 2018. S&P and Fitch may upgrade their ratings once the disposal is complete. 

  • Ceramtec settled final terms on its buyout package by BC Partners and CPP Investments. It was unsurprising, given the recent favour shown to the loan market over bonds, that tranches shuffled to €465m (from €515m) on the SSNs, and €1,480m (from €1,430m) on the TLB. There was also a noticeable disparity in pricing, with the SSNs at 5.25% (IPTs 5.25-5.50%, par) versus the floating TLB at E+375 bps – with a small 99.50 OID (albeit with an extra years’ tenor). Issued at par, the notes have since softened slightly, seen today at 99.7.

High Yield Secondary

Secondary was down this week, losing an average of 0.44 pts (17% +0.30 pts | 81% -0.61 pts). All industries dropped, ranging from Real Estate (-0.13 pts) and Energy (-0.27 pts), to Financials (-0.68 pts) and Healthcare (-0.77 pts).

As we cover in the Friday WorkoutWiZink Bank led the drop in Financials, as its PIK Toggle Notes due 2023 fell to the low 50s on news of a restructuring proposal agreed by Varde and an ad hoc committee of bondholders.

UK-Telco Talk Talk saw its SUNs fall to around 91.5 on Friday, down nearly -3 pts on the week, and more than -4 pts on the month. On Thursday, Fitch followed S&P in downgrading the group to B+ (outlook negative), citing attrition in the customer base, and weak revenue trends.

Elior also fell foul of the rating agencies. Moody’s downgraded the French contract caterer’s CFR to B1, suggesting profitability would be slower to recover than initially expected. The €550m SUNs have lost -2.5 pts since the announcement last Thursday – and are now trading at par.

There were few names with markable rises, although Matalan’s £130m 2nd Liens due 2024 popped +15 pts after Q3 earnings were released on Monday. As reported, reduced discounts and quicker turnaround of stock levels helped Matalan to mitigate a sharp increase in cost of sales and six week delays in stock deliveries. Little fresh information was given on the prospect of refinancing the group's debt, which also includes £350m SSNs due in January 2023.

Across broader indicators, the iTraxx crossover was seen this morning at 262 bps, having widened steadily over the week (253 bps last Friday). According to BofA Global Research, there were outflows for Global (-$912m) and US-focused (-$241m) funds, while Euro-focused managed another slight inflow (+$18m, down from +$71m last week).

Leveraged Loans Primary

Loans primary is heating up with eight new deals added to the pipeline. Investors will be trying to keep the four handle trench, as banks offload deals they were sitting on from 2021 into a hot market. 

The first LBO pricing of the year, German manufacturer Ceramtec wound pricing tighter from the initial talk, and also managed to keep its aggressive documentation unscathed outside of the usual concession on margin ratchets. Three ratchets at 0.25x intervals were replaced with one at 1.0x of deleveraging, but pricing was tightened by 25bps, breaching the 400 bps barrier. 

Investors are not excited about the credit strength of the current offerings, and the fear across desks is that with the prevailing risk-on appetite we might be in for a repeat of the first quarter of 2021. A year ago a slew of deals and repricings managed to tighten pricing significantly alongside covenant erosion. 

“CLO demand is not going anywhere, and everyone wants a floating rate product now because of inflation. What I am worried about is that docs will stay in the borrower’s court for a while,” said a portfolio manager. 

Spanish swimming pool services company Fluidra tightened price talk for their US dollar loan which is now guided to pay 200bp over SOFR, plus a credit spread adjustment, at the tight end of earlier price talk of 200bp-225bp. The euro loan remains unchanged at 225bp over Euribor, with a 0% floor, while the US dollar loan has a 0.5% floor. The euro loan is guided at a 99.75-par OID while the dollar is at a 99.75 OID, versus a 99.5 OID for both loans at launch. 

One deal that the market is eagerly awaiting is Morrisons’s big LBO. “We are waiting on it any day now, as the Christmas trading numbers are out. I think the delay is because they need both markets to be functioning. Loan market is busy, the HY leg is not there yet,” said the PM. 

From next week pricings, Swiss simulation software firm AutoForm is looking to be a buysiders’s darling and should ride out its new €475m Term Loan B syndication without many dents in the term sheet.

The cash generative business has a sticky product with low churn rate and a desirable market position as a key supplier servicing automotive OEMs. It enjoys a specialized position within its technical niche with almost no competitors breathing down its neck. High leverage is eased by a more than comfortable equity cushion due to its high market valuation.

Despite being fairly small in size and concentrated on a single product, it is still attractive to buysiders given its relative value to comps. Bigger PE house Carlyle is taking the controls from French buyout firm Astorg and the only tough pill to swallow is once again aggressive documentation – most notably margin ratchets, lack of ticking fees and day one availability – which the top tier sponsor is probably going to get away on the back of heavy demand. 

BC Partners-owned plastic shed company Keter Group is on the comeback trail with a refinancing of its full capital structure, less than a month after the firm was forced to postpone its New York IPO amid market turbulence. But investors with longer memories will recall tough times in 2018 and 2019, when its main facilities were downgraded to triple-C and it was forced to raise new debt at 91 — and question whether the Covid-era customer splurge on new garden furniture and sheds will continue. 

A new entrant from midmarket, the Dutch firm Group of Butchers (GoB), is out to whet buysider appetite. A comparatively lean business for the leveraged loan market, the artisanal meat manufacturer has bulked up in recent years through M&A and is appealing to buysiders with its “attractive” pricing, non-cyclical demand and outperforming margins.

However, concerns on limited diversification across geographies and product lines, as well as the potential risks related to ongoing M&A-backed growth, are keeping some plates clean. Benelux mid-market sponsor Parcam, who acquired the business in October 2020 with €90m of equity, is also unknown to the buyside. More to follow in 9fin’s preview of the business. 

Dividend appetite

KKR-majority owned hair care retailer Wella is coming for a dividend through a seven-year covenant-lite loan refi, which will be split between a syndicated €800m euro tranche and a pre-placed sterling tranche. Former owner Coty retains a 25.9% stake.

Spanish sports management business Dorna Sports is another issuer hungry for a dividend, scheduling a lender call on Tuesday to discuss its plan to raise a €975m term loan. Proceeds will refinance a €840m dual-currency TLB, denominated in dollars and euros, that is due in April 2024 and fund a shareholder distribution to Bridgepoint (41% shareholding), CPPIB (39%) and other management (20%).

French mobility solutions provider TGS Solutions (owned by HLD) is marketing a €320m TLB to refinance an existing Unitranche. Elsewhere, Grupo BC, the Spanish mortgage and banking services platform is also in the market with a €330m seven-year term loan B funding Silver Lake’s acquisition.

Leveraged Loans Secondary

The Secondary market staying stoic reflects a waiting game early in the year. “Secondary names are moving maybe a half point, because the market is pretty expensive at the moment. You can get some stuff, but it's still a little bit pricey. Until quality stuff starts coming into primary and people want to trade off, I don’t expect big moves,” said a second buysider. 

Some activity arose as the first big BWIC stirred the calmer waters of the loan market. Bids were due for a €108m-equivalent portfolio of European bonds and loans on Thursday (20 January) at 1pm UK time. 

The list comprised 24 tranches, 19 of them euro-denominated, totalling €82m and six sterling pieces amounting to £21.6m. The majority of the offerings are TLBs but also six bonds are up for grabs from AfflelouCabot FinancialItalmatchKiloutouMatterhorn TelecomVerisure and Virgin Media.

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

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