LevFin Wrap - Wake me up before you Go-Bo
- Huw Simpson
- +Kat Hidalgo
High Yield Primary
As we close in on the August break, ‘recession’ is increasingly the word of the day, though perhaps tempered by steady job reports in the US, where nonfarm payrolls added a further 372K today (forecast 268K). Across the wider market, commodities were hit hard in the early part of the week, with fears of slowing economic growth briefly pushing Brent crude below $100 on Wednesday (since recovered). Natural Gas is still the outlier, and on Tuesday hit its highest levels since early March as Russian Gas supplies are set to be cut next week.
Meanwhile there was some optimism in the equity markets, after the worst half for decades, the STOXX 600 (+1.8%), S&P 500 (+3.1%) and FTSE 250 (+1.0%) were all up on the week. Even the iTraxx Crossover is managing to hold in at below 600 bps, albeit only just.
Primary activity remains skewed towards existing M&A, especially where underwrites are forcing banks to offload risk. Liquidity remains a problem however, with new deals still offering a weighty premium to compensate buyers. European corporate bond fund outflows (which YTD now total more than 18% of AUM according to Credit Suisse) have reduced the buyer-base for any new HY deals, and the re-rating of existing debt offers a powerful incentive not to sell out of positions and crystallise a loss.
Presumably there are now bargains to be had in Secondary – which is in part holding back demand for new issuance – but securing positions of any size will be tricky, given secondary market liquidity concerns. For those who are able to buy, investors are unsurprisingly focused “on credits with strong liquidity, solid free cash flow and long debt maturity profiles [which] should help mitigate pressures felt by rising rates and slowing consumer demand” – as Kevin Wolfson of PineBridge Investments outlined in last week's 9Questions.
Them's the breaks
With few options, and fewer ministers at hand to plug the increasingly leaky ship, British PM Boris Johnson stepped down as leader of the Conservative Party on Thursday. He may yet remain as caretaker until the Autumn – although jockeying for position, the FT outlines a number of upcoming runners and riders for the top job.
However, the mass resignations could have a positive effect on 888 – as Gambling minister Chris Philip stepped down on Thursday morning, delaying the unveiling of a white paper on gambling reform.
After an elongated bookbuild over the 4th July weekend, terms for the 888-WH acquisition finally emerged on Friday morning, with a number of investor-friendly doc changes to complement.
The £1,017.3m equiv. financing will comprise €300m SS FRNs due 2028 at E+550 and an 85 OID, plus €400m SSNs due 2027 at 7.558% and an 85.346 OID. A $500m TLB due 2028, in addition to a £358.1m delayed draw TLA and £400.5m (€-equiv.) TLA will also make up the financing.
With caps in place on financing underwritten in better times, widening OIDs have become commonplace, and at levels in excess of the 2020 Covid reopening of LevFin.
In other news
Following a report from Sky News in April that Center Parcs owners Brookfield were exploring a ‘£4bn sale’, management on Thursday commented, “it’s only natural they would look at strategic options after seven years of ownership”. The group has been assisting the sponsor with analysis, in addition to involving external advisors to help with that strategy.
Over in ecclesiastical finance, the Church of England investment foundation was in market hoping to raise £500m across two 10-16 and 30+ year tranches. Named Project Cranmer, the FT points to a risk factor outlining “a threat of, or actual, disestablishment of the Church of England from the State, particularly in the event that such disestablishment were to lead to a dispersal of the Issuers’ assets”.
High Yield Secondary
Secondary prices managed a rare gain this week, up +0.26 pts (60% +0.84 pts | 38% -0.64 pts), as the iTraxx Crossover closed on Thursday at 581 bps – inside last Friday’s close of 591 bps, and Tuesday’s peak of 616 bps. However, we’re still not that far off levels seen in April 2020, and the ICE BofA EHY OAS is in the high 6s – an area which prior to the Covid peak you have to go back to 2012 to see. Across EUR and GBP instruments, prices have dropped from an average of 100.6 in early Jan-2022, to 86.6 as of today, a -14 pts fall, and median spreads are now ~7.0%.
Fund flows clocked in another significant outflow last week, the fifth in a row, and largest since March 2020, according to BofA and EPRA Global. By fund focus, these were split between Global (-$1,224m), US- (-$602m) and Euro-focused (-$666m) funds.
Across Industries, Healthcare (+0.81 pts), Communication Services (+0.77 pts) and Real Estate (+0.52 pts) managed some gains, while Energy (-0.19 pts) and Financials (-0.33 pts) tracked modest losses.
One of few earnings updates this week, France-based BioGroup LCD held its Q1 2022 call today. Reported revenues are up 8.3% YoY, led by acquisition contributions, although EBITDA margins fell to 41.6% (versus 49.9% in Q1 2021) due to lower Covid testing activity. France announced another price decrease in tests as of 27 June, which is likely to push margins lower, although management declined to provide guidance. The group’s SSNs due 2028 and SUNs due 2029 are both up ~1.1 pts on the week.
Elsewhere, PVC manufacturer Kem One also held its Q1 earnings call. Revenues are up 48% YoY, as higher prices more than offset cost increases and declining PVC & Caustic Soda volumes. LTM pro forma EBITDA is now €362m, with reported net leverage of 0.8x and €263m in liquidity. Issued in late 2021, the SSNs due 2028 were largely unmoved on earnings, and were last seen today at 80.8.
Leveraged Loans Primary
The 888 saga continued this week, with revised price talk somewhat aptly heading into the 80s. The gaming company has already hit a number of obstacles, removing a proposed euro-denominated TLB and delaying pricing for the remaining instruments to this week “due to a delay in posting the US TLB agreement,” as well as US Independence Day.
The proposed $500m TLB priced at S+C+525 bps with an OID of 85, and a 0.5% floor, down from OID talk of 92-93. Several “investor-friendly” documentation changes have also been made.
One buysider mentioned the deleterious effect such pricing would have on the leads, which for this deal include JPMorgan and Morgan Stanley. “At 95 they’re giving away all of their fees,” they said. “At 90, it’s a disaster.”
Incoming regulation from the UK government, as well as concentration and execution risks, left some investors unsure on the credit, while familiarity with the name wasn’t even helpful to US investment teams with little knowledge of the European gambling market. ESG issues were also at the forefront of many buysiders’ minds.
“We couldn’t move things around enough in our portfolio to fit in more gaming sector exposure, so we had to pass on this one,” said a second buysider.
Ready Gaming One
Also trying their luck in the LevFin market is Belgian casino and sports betting firm Gaming1. It’s a risky play, according to buysiders looking at the €300m TLB (rated B1 and BB per Moody’s and Fitch). Price talk for the tranche currently sits at E+525 bps and 95.
Though leads Macquarie and BAML haven’t announced any formal delay yet, commitments for the deal were due 6 July and no pricing update has been seen by 9fin. A source close to the situation said the market can expect an update today (8 July), because the leads were letting lenders “take in” the 888 price guidance.
“I don’t think 888 is representative of the market right now,” said the source. “The market isn’t that bad, it’s just the new regulation [for 888] that’s the issue.”
Gaming1’s smaller issue is thought to be intertwined with the progress of 888 as many lenders would prefer to hold just one of these names, if either. “It’s really bad timing for Gaming1,” said a third buysider. “Everyone was prioritising 888 even though this one launched first.”
“We like gambling at our firm,” said a fourth buysider. “We think it’s a leisure activity like any other, but at the same time, you don’t want to be overexposed to it.”
Several features of Gaming1 diverge from 888. Apart from its significantly smaller size and lower leverage, the Belgian gambling market is thought to be more mature and thus more stable. Clients can see our loan preview here. If you are not a client but would like a copy, please complete your details here.
Nevertheless, given 888 price talk, Gaming1 is unlikely to come higher than the low 90s and it may even be pulled in preference for direct lending, two buysiders speculate. The fourth buysider said: “It shouldn’t come higher than low 90s because I could buy Lottomatica for a yield of 7-8%, and that’s a more diversified, known issuer. Gaming1 needs a liquidity premium, it needs a gaming premium and it needs a first time issuer premium, though it does get a CVC discount.”
Rodenstock also cleared a €150m add-on this week, at E+500 bps and an 88 OID, according to LPC. The loan, fungible with the opthalmic lens maker’s original April 2021 €660m TLB, will support the purchase of Indo Capital. Indo also makes lenses for specialised specs, particularly in Morocco and Spain.
Rodenstock’s €660m loan has lost focus of late, trading into the low 90s since the beginning of May, but given the pricing of this add-on, it has dropped again, last seen yesterday at 89.50.
Given the current volatility, it makes sense to not be restricted on a name just to get an early look at a tiny tranche.
As the second sellside source said: “€50-100m tickets are now at €10-20m.” But the first buysider suspects even these early-bird offers will come to an end soon: “I think banks have a week left to issue, or they’re not going to have enough people to launch anything before the summer.”
If you haven’t already said goodbye to the prospect of a general syndication this summer for mega-deals like Morrison’s and Unilever Tea, it’s probably time to do so. According to the first buysider, £2.2bn still remains of the former’s TLB, but given the current situation, we can’t expect that to be offloaded before September.
One sellside source and a buyside source also expect CVC’s deal for the €4.5bn acquisition of Unilever’s Tea division will stay quiet until the autumn, and could be poured down to direct lenders then.
The sellside sources agree that about €35bn sits in the underwritten backlog across European HY and leveraged loans, with one optimistic sellside source saying they thought half-to-two thirds could be cleared by the end of the year.
But with the market dreary, banks have put a stop to this backlog growing any larger. The underwriting engine has shut down, with three sellside sources suggesting many banks are no longer taking on new deals.
“Show me a bank that’s still underwriting! You would have to be crazy to keep underwriting anything now,” said the second sellside source.
Leveraged Loans Secondary
The market is, once again, very in the red this week, with only real estate and utilities as upward-moving industries.
However, individual company moves, particularly fallers, were more muted than last week’s dramatic double-digit declines for the lowest performing credits.
This week, the farthest falling credit was Partner In Pet Food’s €265m TLB, which dropped 6.8 pts and is now indicated at 89.6-mid. In December 2021, Moody’s downgraded the business from B2 to B3 based on rising cost inflation and an “aggressive approach to acquisitions.”
The producer price index for pet food has become considerably more expensive this year, rising by a sharp 12.6% in May, according to Pet Food Industry. Animal feed and soybean price increases will continue to impact pet food going forward.
Following closely behind is Schur Flexibles, whose €475m TLB dropped 5.4 pts this week and is now indicated at 39.25. The credit took a slight uptick after the business secured unanimous consent from its SFA and supply chain lenders to its restructuring plan on 6 June, but has now fallen to its lowest level since. See 9fin’s latest update here.
As reported, on 24 February lenders were briefed on accounting issues, which led to a 25-point drop in the TLB and then advisors A&M and KPMG were brought in to investigate after the departures of the former CEO and CFO in December.
Shortly after, restated FY 21 EBITDA came in sharply lower at €39m, with accounting adjustments of €41.2m, with FY 23 EBITDA estimated at €75m, compared to €116m forecast at last September’s LBO.
After sponsors B&C and Lindsay Goldberg confirmed they would not be providing the required funding in April, Apollo submitted a proposal on behalf of the lender coordinating committee offering a 75% haircut, and a €150m new money injection to provide greater liquidity headroom.
The Opco/Holdco bifurcation was dropped with the company expressing support of the proposal, as reported. The first tranche of the new funding was drawn in early-June.
Dressing down to move up
With more positive news, Dutch lingerie retailer Hunkemöller’s €280m TLB jumped nine-points this week and is now indicated at 97-mid. Direct lenders are mulling the possibility of providing a private credit facility after the Dutch brand was acquired by Netherlands-based sponsors Parcom and Opportunity Partners earlier this year. Carlyle will continue to hold a minority stake. Clients can see 9fin’s latest update here.
Banks JPMorgan and ING provided a bridge facility to refi Hunkemöller’s loans following the acquisition and sources close to the deal said no long-term funding solution has been found yet given the troubled state of the European high yield and leveraged loan markets.
Prior to the acquisition, Hunkemöller’s debt structure included a €285m TLB, trading in the high-80s when the M&A process was announced in late March, a €80m second lien facility pre-placed with Apollo and a €70m RCF. The debt structure left Hunkemöller around 5x leveraged, based on an 2021 adjusted EBITDA of around €90m.