LevFin Wrap - Upfield butters up investors; PDA blows a fuse

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LevFin Wrap - Upfield butters up investors; PDA blows a fuse

Ben Hoskin's avatar
Michal Skypala's avatar
  1. Ben Hoskin
  2. +Michal Skypala
9 min read

The risk-on rally predicated on hopes of easier monetary conditions appears to be cooling along with the weather on the continent. The uncomfortable heat instead manifested through a monster upside inflation surprise in the UK, suggesting we’re far from out of the woods.

A ferocious and broad-based UK CPI print, coming in at 10.1% (6.2% core; 12.3% RPI), topped expectations of both private-sector economists and the BoE and begs the question whether the 13% peak inflation forecasted by Andrew Bailey et al. two weeks ago now looks too dovish. Rising food prices was the biggest contributor, pushing consumer spending firmly into the red.

The response in markets was a ratcheting up of tightening expectations, now signalling a further 175 bps of hikes by February and leaving the 2s10s gilt curve the most inverted since 2007. Growth forecasts remain weak for Britain, with another leg up in household bills looming in the Autumn when the energy price cap increases, leaving the BoE in an increasingly impossible position.

Over in Europe, Isabel Schnabel of the ECB said that “in the short run, inflation is going to increase further”, with a 50 bps hike at next month's meeting fully priced in. Fed speakers this week maintained the need for further hiking, but kept markets guessing over whether 50 or 75 bps is up next in September.

The iTraxx Crossover reversed a robust tightening that had put it within touching distance of 450 bps, gapping wider after the UK CPI print pushed the index back out to 492 bps as of Thursday’s close.

However, as discussed in our most recent edition of Blessed to be Stressed, default risk remains relatively low in HY.

Firstly, the refinancing wave that took place in the second half of 2020 and 2021 has pushed maturity walls out to provide corporates with some much needed breathing space.

Additionally, headline credit metrics are relatively strong. Certainly some pockets of the market look slightly overlevered, but interest coverage metrics are supported by low fixed coupons. 65% of coupons across EHY fixed-rate SSNs and SUNs are 5.125% and below, comprising some €480 billion of debt.

One thing the confluence of distant maturities and low coupons should lead to is less issuers redeeming bonds early. However, as explored in this weeks 9fin Educational, a combination of shrinking non-call periods and cheaper call premiums peddled over the past decade has made redemption much cheaper and more accessible for issuers and sponsors.

Clients can find all of our 9fin Educational pieces here.

High Yield Secondary

Secondary prices reversed recent strength, softer by -0.54 pts on average, with 76% of instruments tracked by 9fin in the red. All sectors experienced declines, with Healthcare and Communication Services both dropping by over a point (-1.1 pts and -1.01 pts, respectively).

High-yield funds kicked on from last week's inflows with another gain, as Europe led the way.

Telcos (1.13 pts) were one of the worst performers on the week, presumably driven by the relative convexity of the sector with rates vol on the rise again.

In single names, a big gain Friday came from Kedrion, the Italian therapeutic product manufacturer, who announced a full redemption of its €410m SSNs due 2026. Closing yesterday at ~93, the bonds jumped to just below par following the announcement.

The redemption is conditional on Permira acquiring a controlling stake and merging the business with UK competitor BPL, as agreed in January. The bonds are portable, but at a leverage point much lower than current, and the bonds otherwise aren’t callable in full until May 2023, meaning the CoC will cost Kedrion an expensive make-whole.

9fin’s Emmet McNally had you covered on two other big movers on the week.

PDA, a carve-out of Royal Phillips that manufactures domestic appliances, saw its €650m SSNs due 2028 drop ~five points to 67.375 following a poor Q2. Our deep-dive published earlier in the week foresaw a multitude of headwinds, many of which will be amplified in the second half on account of unfavourable FX movements and the increasing squeeze on household incomes.

And Netherlands-based margarine manufacturer Upfield delivered a positive surprise with second quarter earnings as pricing is starting to catch up with input cost inflationary headwinds that have likely peaked. The subordinated paper jumped 10 points to the mid-70s on the release. See the full earnings review here.

Matalan 2L debt continued its bumpy ride that is likely driven by slim liquidity, but at 43.75 (down 12 points on the week) it now trades at its lowest level since March 2021, not being helped by the UK inflation print.

The second lien remains firmly dislocated from the SSNs (78.25), where bondholders were recently given a rare boost by the return of founder John Hargreaves as chairman. Refinancing talks are set to commence next month, with expectations for Hargreaves to inject some capital to help smooth the process.

The biggest loser of the week was business-process outsourcing company Atento following an underwhelming first half and a negative outlook revision from S&P. The ratings agency said that deleveraging prospects are uncertain “considering the need to recoup profitability and lost revenue from last year's cyberattack”, as well as more employees working from home intensifying competition in the industry. The company’s $500m SSNs due 2026 dropped 14 points to 47.25.

Leveraged Loans Primary

Not a single loan was launched into becalmed European primary this week and not a single soul at 9fin was surprised. In a more challenging year for execution, mid summer holidays are probably not best timeslot an issuer would pick to test the still highly volatile waters of corporate debt.

Investors are at least receiving echo soundings for a fairly busy deal calendar in the second week of September. Syndicates are still secretive about which names could hit the market and how the final structures will look. Timetables and structures remain moving parts very close to launch, especially now with the possibility of private credit biting into pieces of paper.

The Financial Times reported that Thomas Bravo is mulling an offer to take cybersecurity firm Darktrace private, opening potential for another LBO worth $2.4bn of new paper. Breath of fresh M&A news is gaining traction with buyside who could see buying into this type of deal.

“Perennial and new investors will be open to look at it, given that is a strong credit that is not carrying the same breadth of risks as most of other sectors,” said a CLO analyst. “On the Morrisons and Ekaterra deals, I can’t say there would still be an enormous demand, but everything has its price.”

One deal that is already cooking is Technicolor’s spinoff of its special effects division, TCS. But this won’t go to the wider market, as the new debt facilities are provided with a former banking syndicate with debt advisors Rothschild pitching a ~€620m equivalent four-year TLB at E+600 bps and an OID in the 95 range, 9fin reported. The facility is composed of two tranches, a €563 million tranche and a $60m dollar tranche.

As in line with the 2022 trend, TCS opted out of the usual syndication route, trying instead to persuade existing lenders to reinvest. The new financing should push TCS’ leverage to around 3.7x, based on forecasted 2022 EBITDA. TCS provides animation and CGI services for the film, animation and gaming industries and is forecast to generate €180-190m of EBITDA in 2022.

Leveraged Loans Secondary

The loan rally seen over the past few weeks is losing some of its legs, although the buyside is quoting minimal trading activity due to summer lull in an especially inactive year for secondary.

Not all industries were in the green this week, with utilities, health care and energy all contracting less than 0.2 points on average with communication services leading the fall sliding 0.4 points.

Netherland-based margarine producer Upfield (Flora) helped to boost consumer staples as surprisingly positive earnings on Thursday saw their loans burst to the upside. The €375m TLB paying E+ 350bps picked up more than five points to a 88.6-mid quote and is currently yielding around a 8% discount margin, according to a buysider invested.

Investors had steeled themselves for another poor quarter. But while volumes were down, prices were up an impressive 24.3% on average, more than outstripping the weakness in sales and rises in input costs. Management provided upbeat forward looking guidance on the call, forecasting that leverage would drop from 8.7x to 8x by year end.

Upfield (Flora) secondary pricing

But with a big maturity wall in 2025, there is still some way to go to make its capital structure more palatable.

“I would think it would fall off the cliff and it wasn’t the case so I need to give them credit for a good second quarter. If they keep delivering the positive outlook the refi door might be open, but they have to do significantly more. It is still a stressed name,” added the buysider.

Conversely, Australian oncology provider Genesis Care gave its lenders more heartbreak this week as its loans took another massive hit. The €500m TLB paying E+ 350bps was down over 15 points from last Friday to 48.3-mid and the €300m TLB paying 53.5 slumped 12 points to 51.3-mid, according to 9fin data.

9fin reported last week that the sale of Genesis Care’s cardiovascular unit was anticlimactic for lenders who expressed disappointment over the net sale proceeds, around half the anticipated result. Some expressed concern that the estimated 12-18 month turnaround of the troubled US business is taking longer than an expected and that KKR’s interim cure of A$75m shareholder loan might not last long enough to bridge to recovery.

Adding to their concerns, China Resources which owns another third of the business has not yet committed to deploy further funds to aid liquidity and is still internally negotiating over their A$88m commitment.

Genesis Care secondary pricing

With energy prices soaring and European droughts affecting production, pressures in French food sector continue to be elevated and buysiders are split on whether to buy more Prosol paper or to sell out after a recent ten point rebound in secondary, 9fin reported. The €1.382bn TLB has been gradually picking up from the bottom of 75 levels in mid July to a current 84.1-mid quote.

The French fresh food chain faces “difficult quarters ahead” as challenges arise from a sharp increase in food prices. The Ardian-owned group’s B/B2-rated €1.382bn E+400 bps TLB due 2028 has seen a flurry of trading activity amidst this summer’s secondary repricing storm as spooked by the soaring leverage and the unfavourable short-term outlook some CLOs sold out last month.

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