Market Wrap

LevFin Wrap – 888 rolls the dice

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

High Yield Primary

Following the worst week for HY markets since March 2020, banks decided things couldn’t get any worse and hit the launch button on two risk-on debt-fuelled buyouts, ending a four month dearth of primary action. Of all of the EHY reopening candidates that have been batted around in the downtime, few had a fixed-rate B3/B rated deal near the top of their list.

But Credit Suisse hasn’t been a stranger to surprising markets in recent times. When it announced Lone Star’s buyout of chemicals business Manuchar (B2/B) late last Friday, many were caught off guard. Syndication on the €350m SSNs due 2027 (B3/B) was helped by a good week and a half of pre-marketing, as well as a preplaced €75m slug, which we understand was placed with a CLO manager.

$201.1m of EBITDA was normalised down for “exceptional margins” to $105m for marketing purposes, in large part thanks to global inflation that allowed Manuchar to sell inventory bought at low 2020 prices at high 2021 pricing. Proximity of the company’s assets in and around ports also helped margins, with customers happy to pay up for supply chain reliability.

But as 9fin’s Owen Sanderson discussed in our deal preview:

“The key questions for the business are how this plays out in future — will the beneficial confluence of circumstances unwind again in the future, and where will that leave Manuchar? Admittedly bullish views on low inflation and a quick resolution to supply chain problems are in short supply right now, but the bonds could be outstanding for five years, so investors will want to be reassured they’re not top-ticking the company’s performance.”

The other stick (as discussed in our Financials QuickTake) is that working capital has been ploughing through cash flow generation recently, as inventory purchases increased in response to the sales growth momentum the company enjoyed in 2021.

A healthy equity check of around 55% (see our interactive cap table here) provides investors some comfort, as does stripping out the Covid boost to portray a more realistic leverage figure in the future. However, our legal analysts highlighted the potential for management to adjust the latter upward significantly in the future, as well as the low guarantor coverage thanks to a fair amount of subsidiaries in emerging markets where granting guarantees and security isn’t particularly easy (or meaningful).

The goal appeared to keep interest costs in line with previous years at ~$25m, achieved through pricing the bond at a heavy discount. Price talk on the €350m SSNs came at 7.25% @ 86 - 87.5, pricing at the wide end on Wednesday at 86 to yield 10.95% all-in (equating to ~€25m interest). Despite the relatively weak covenants, there was surprisingly no pushback on the covenants package (clients can see the pricing supplement here)

Finally, why the euro tranche for a dollar-based company? We weren’t entirely sure either, but those close to the deal pointed to the EMEA presence with the company based in Belgium, as well as euro-based investors having more familiarity with names in the chemicals space.

Time to play the game

Then came 888’s long-awaited acquisition debt to fund the purchase of William Hill’s non-US assets from Caesars Entertainment, sitting on J.P. Morgan’s books since last summer. Originally valued at £2.2bn, regulatory changes in the UK gambling market and an ongoing investigation by the UK Gambling Commission saw the purchase price trimmed to £1.95bn-£2.05bn, earlier this year.

The financing includes £1,017.3m-equivalent of 5NC2 EUR SSNs, 6NC1 EUR SSFRNs and Term Loan B debt - the latter taking up $500m of the £1,017.3m. Completing the package is a £358m TLA, a £401m-equivalent EUR TLA (no syndicated TLB tranche), and a £150m multi-currency RCF.

Unusual for an acquisition, our Legals QuickTake noted the absence of escrow mechanics, which could be problematic if the deal doesn’t close. Although the acquisition was approved by the requisite shareholders, certain FCA approvals are pending. As we’ll see shortly, a 25% cap and 24-month time horizon on EBITDA add backs was a key legal consideration.

The marketed EBITDA figure took us back 12-months to a time when heavy adjustments felt like a prerequisite for selling debt, with combined pro forma EBITDA of $100.9m jumping to $555.4m (£405.3m). $287.2m of exceptional items were driven by ~$100m of goodwill impairment and $187.4m of exceptional legal and professional costs - $90m relating to M&A advice for this deal, and the remainder related to fees associated with Caesars’ acquisition of William Hill before selling the non-US operations to 888.

There was also $69.1m of add backs related to William Hill’s forced shop closures during the first 18 weeks of the LTM Feb-22 period. To quantify the impact, the Jun-21 to Feb-22 performance was annualised and the difference between the actual LTM Feb-22 and this annualised figure was taken - a fairly crude assumption considering there was a major football tournament that was largely hosted in the UK last summer. $74.1m of cost synergies made up the adjustments.

The GIC took place Thursday, with no price talk on the bonds to emerge as of the time of writing. Commitments on the TLB are due on June 30, guided at S+CSA+525 bps @ 92-93.

High Yield Secondary

Following last week’s rout, there was a small bid on the week (excluding today’s price action) into the iTraxx Crossover to close at 558 bps on Thursday (vs. 563 last Friday).

However, another week of ugly fund flows weighed on cash prices. According to BofA, high-yield funds registered the biggest outflow in 15 weeks, with Euro-focussed funds suffering the most.

This translated into instruments tracked by 9fin falling by -0.31pts on average (-0.26pts when removing the Adler and Samhällsbyggnadsbolaget instruments, which we will come back to), with just two sectors in the green. Consumer Staples (+0.17pts) and IT (+0.15pts) were the two biggest outperformers, with Industrials (-0.38pts) and Energy (-0.27pts) amongst the biggest losers.

It was more pain for Real Estate (-2.14pts) this week, dragged down by Adler and SBB debt falling on average by ~6.4pts and ~11.5pts, respectively.

The former was hit by the announcement on Wednesday that the ECB will be selling an Adler bond it held as “the debt is no longer in line with the Eurosystem collateral framework eligibility criteria”, adding to months of investor concerns that originated with a Viceroy report in October 2021.

And Fraser Perring’s short-selling fund was at it again this week for the other big mover in Real Estate, SBB, citing cash flow reconciliation errors in an updated report. In a similar vein to their initial Adler research, Viceroy Research claims that SBB’s consolidation of acquisitions is incorrect and unjustly inflating asset values.

Back to addback

888’s monster adjustments got us thinking about our report last October, where we explored the myriad EBITDA add backs we had seen throughout 2021.

We revisited some of the names from the report to see how their debt has traded relative to the size of EBITDA adjustments seen in marketing. The below graph comprises 96 instruments from 95 issuers, for deals issued between January 2021 and October 2021.

One of the most noticeable features of the graph is that no instrument has traded up in secondary, which isn’t surprising given rates volatility since the turn of the year.

There isn’t a particular trend within the data, with even companies such as BUT and PDA preceding Manuchar in reducing marketing EBITDA down against the clean figure, but seeing their debt get hammered in secondary anyway.

The data is also by instrument, so it's unsurprising to see a lot of those trading off the most sitting further down the cap stack. Points of interest could be those trading at a big discount with add backs as a % of clean EBITDA >50%; particularly when thinking about the subs, is the marketed EBITDA figure used that allowed them to borrow the quantum of debt realistic in a post-covid, inflationary economy? If the answer is no, those down the cap stack will take the hit first.

We will be producing a report scrutinising the add-backs we saw in a number of these deals in the near future, looking to answer this question.

Leveraged Loans Primary

Leveraged loan issuers are slowly testing primary waters again. The long awaited hung acquisition financing from UK gaming company 888 finally hit the broadly syndicated market offering £1.017bn of paper split between €-denominated senior secured notes and a US dollar TLB tranche.

It is not surprising the UK bookmaker is trying to execute in the US loan market, given a wider investor base still willing to take primary paper. A couple of weeks ago another round of European presounding failed to generate much traction for the deal. “They were presounding the loan to us in April, but we declined. Even with the new price tag, the regulatory issue remains a no for us,” said one European buysider.

Price talk on the US loan is SOFR+CSA+525 bps at a big 92-93 OID with 0.50% floor,   Commitments are due on Thursday (30 June). No ratings have been released, but our assumption is around single-B.

Therefore, European loan buysider interest is turning toward Dutch cancer diagnostic company Affidea which launched a €600m term loan B to fund its takeover by The Groupe Bruxelles Lambert (GBL). It is the first broadly syndicated LBO in Europe since Refresco’s print on 5th of May.

A stable name with all the trappings of a well-positioned healthcare business in Europe, Affidea has moderate leverage and a strong €1bn equity cushion. Nevertheless, not all buysiders are convinced that business will stay unaffected by macroeconomic impacts such as labour inflation and are questioning the credit’s relative value.

As a second buysider said: “There’s downward pressure on the OID as it’s all about relative value. It’s obviously a stable name, but we need to be disciplined about where we’re making the most value for our investors.”

Syndication was helped by a relatively short pre-marketing period with existing lenders and a couple of new lenders in the targeted process. Feedback was strong, market sources told 9fin. Rollover from existing lenders is at prices slightly tighter than the initial starting talk.

Price talk is currently at E+475-500 bps with a 95-96 OID. Corporate and facility ratings are both B2/B+ (Moody’s/S&P). The deal is being marketed off €150m pro forma EBITDA giving 5.3x total net leverage including €185m of IFRS-16 leases and €25m cash on balance sheet.

A source close to the situation agreed that relative value was a vital point: “People like the credit, especially those who are already in it. But relative value is going to be important here and we’re looking at where the market is pricing. You see Inovie, you see secondary levels and these debates are happening for this one.”

Given the dearth of other healthcare issues in recent months, Inovie’s June 22nd issue is reasonably comparable. The €400m add-on loan was guided with a E+500 bps margin at a 96-97 OID and supports the acquisition of BioClinic and associated transaction fees and expenses. Even though buysiders like its stable sector and healthy margins, Covid-19 testing tail winds are abating, amid minimal organic growth and a lack of geographic diversification.

“I didn’t particularly think Inovie was struggling, [their] performance is okay, an acquisition to enter the Paris region makes sense, but the seller is rolling up equity and the multiple was a bit on the high side,” said a third buysider. With so many French labs to choose from in the loan market, there is less appetite to add more exposure, especially in the absence of new money,” they added.

Net leverage for the transaction will sit at 5.9x and gross leverage is 6.5x, based €333m in adjusted EBITDA. These figures fall to 3.1x and 3.4x, respectively, based on reported EBITDA, when not adjusted for Covid-19 benefits of uptick in lab testing. Inovie had exceeded the sector’s growth rate of 0.5%, by another 0.5% in Q1 2022. Liquidity is also robust, with €188m of cash on the balance sheet and a fully undrawn €175m RCF available, after the transaction. The RCF has a 9.35x springing leverage covenant (senior net leverage) if drawn by more than 40%.

Given market volatility and absence of many CLO PMs who were attending Global ABS in Barcelona last week, many accounts chose to make their commitment decision at the last minute. Reflecting the difficult current market conditions, the add-on printed at E+ 500 bps and 94, from 96-97 guidance, compared to just E+375 bps and a 99.5 OID for the original €772m TLB issued in December 2020. Both loans mature in March 2028.

Leveraged Loans Secondary

As investors see their current loan exposures trading down yet further, uncertainty is the main concern for illiquid secondary loan markets. One question is how much of the macro concerns ranging from rate increases, supply chain and recession fears are already priced in, and another question is how much are prices being impacted by technical factors.

“My trader says there is not any liquidity and trades are still not going through. Therefore I always think if something is marked 2-4 points down on a day, whether it is just a small 2m trade moving the sector, or even [the] market,” said a fourth buysider.

Paris-headquartered dough maker Cerelia’s has seen its €495m-equivalent senior secured term loan B move five points lower to 75-mid from 80 last week. On Monday, creditors voted in favour of an amended debt covenant waiver request after initial pushback from term loan B lenders, as reported. Sponsor Ardian committed to putting in €10m of equity up front, with another €15m available dependent on liquidity and capex needs.

Genesis Care has seen both its €300m and €400m TLBs slide to 70.5-mid from 77.5-mid last week. The Australian-owned oncology clinic provider was expected to update lenders on a A$100m capital increase and the divestment of its cardiovascular business which both had end June deadlines, as reported.

Reorg has reported that KKR has agreed to put in a A$75m one-year bridge loan.

Lenders were getting frustrated about the new money injection due to uncertainty whether it will be split proportionally between sponsors KKR and China Resources, said the third buysider. Details are missing on whether the bridge loan will rank super senior, pari passu or junior, and if it will be rolled over, they added.

Fresh food retailer Prosol, supplier to the Grand Frais supermarket chain, has seen its loan slide almost 10 points from 92.5-mid to 82-mid in a week. Hit by inflationary pressures, the company was downgraded by S&P to 'B-' due to two quarters of weak results. The agency expects adjusted EBITDA will drop to €160m-€180m this year, from €244m in FY2021, leading to a 4x spike in adjusted leverage compared with their previous base case. Prosol reported two consecutive quarters of negative free operating cash flow (FOCF), resulting in very high S&P Global Ratings-adjusted leverage of 10.2x (about 9.3x excluding shareholders' convertibles) for the LTM to March 2022, writes the agency.

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