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David Orbay-Graves

Owen Sanderson

The 9fin journalist team found itself on a collective mission to come up with a royal flush of gambling-related puns this week, as betting company news flow was on a roll (and those we couldn’t shoehorn into earlier coverage were saved for this wrap…)

Prompted by press reports that the UK government’s long-awaited review of gambling regulation may land in the coming week, 9fin took a deep dive on what reform might look like – and which credits may be most affected. While few expect the reforms to strangle the industry, limits on online wagers certainly have the potential to bite.

Among those with highest exposure were 888 Holdings, Entain and Flutter Entertainments.

Despite looming regulatory reform, Entain fancied its odds of placing a new deal before the Christmas shutdown – offering a €500m TLB due 2028, and a $250m TLB add-on, due 2029. Proceeds will be used to address a portion of the company’s outstanding €1.125bn TLB maturing in 2024.

Aside from the inevitable ESG questions that accompany any sin stock, the London-listed operator – which owns Coral and Ladbrokes – received a warm welcome from investors, wrote 9fin’s Laura Thompson earlier this week.

That’s been borne out in the syndication process, with the OID on the US piece tightened from 98 to 98.75, and on the euros from 97 to 97.5. The euro piece has also been increased from the original targeted €500m to €800m, which will allow Entain to pay down all of its 2024 TLB in a single hit.

Could we see fellow London-listed gaming operator 888 Holding try its luck next? The company said on Tuesday that it may come to the market in the “coming weeks and months” with a deal to refinance a £347m-equivalent portion of its bank debt. LPC reports that this could take the form of a high-yield bond issuance.

The company’s leverage following 888 Holding’s acquisition of William Hill earlier this year has remained above the level the company hoped, and deleveraging is a clear priority – with a target of net debt-to-EBITDA of 3.5x by 2025. We may find out whether bond investors are willing to take that bet sooner rather than later.

Also in the primary market, though rather less well-publicised, was the final placement of the acquisition debt for Unilever’s tea business Ekaterra. CVC agreed to buy the carve-out at the end of last year, and the sale was completed in June this year, so it’s an underwrite that’s distinctly overbrewed (a sterling portion was placed over the summer to a group of Asian accounts).

But the final slice of the TLB debt was sold down this week, at an OID of 82, to a buyer base which included some of the larger par loan buyers, some of them taking substantial £100m+ tickets. Buysiders appreciated the stability of the business but some felt it was over-levered, with substantial EBITDA adjustments that add more than a turn to the marketed figures.

Nonetheless, it was one of the largest underwrites still on the books, and clearing it before year-end means clean balance sheets and no need to redo the numbers. An 82 OID is not much of a Christmas present to the underwriting banks concerned, and various of the Street’s levfin teams may anyway be expecting coal in the stocking and donuts in the New Year. But at least it’s out there.

This week also brought an intriguing announcement on KronosNet (the combination of Konecta and Comdata).

Leads BNP Paribas, Credit Agricole CIB, Deutsche Bank and JP Morgan placed a €400m TLB at the back end of September (575 bps at 92) to part-fund the combination, but kept hold of a €400m TLA piece.

Now the banks are back with a “minimum €50m” TLB add-on. The banks in question wouldn’t ordinarily get out of bed to syndicate a €50m clip, so presumably they’re after a more substantial take-up if possible (perhaps even the full €400m).

But it’s particularly intriguing as it underlines the temporary and contingent nature of the TLA product that’s helped various of the underwrites get done this year. Banks in private have distinguished “real TLA” deals (the bank debt for MasMovil-Orange for example) from “fake TLAs” forced on banks because they can’t clear underwrites at a reasonable price.

Price talk on the new KronosNet is the same 92 OID as the September deal, but loan market conditions are appreciably better, and the outstanding was last seen at 92.75, so this bakes in a bit of new issue concession.

So TLAs are not, in fact, for life, but merely until the first sign of a loan market rally.

Looking beyond year-end, A&E deals are likely to be the theme for much of the year ahead — Altice International is likely to wrap up its extension deal on Friday, and where Altice leads, other LevFin issuers will surely follow. French healthcare business Sebia increased the deal size on its “slam dunk” transaction, though at the wide end of talk (475 bps margin from 450-475 bps).

We hear other deals in the works include a very large Europe-headquartered services business with dollar and euro debt, but really, we’d expect every issuer with a 2024 maturity and a few with 2025s to be looking right now.

On the bond side, debt purchaser Intrum announced on Friday it was also getting ahead of its maturities, prepping a minimum €300m 5.25 year senior note to part-refi its €900m 3.125% 2024s. It’s a double-B credit with an all senior capital structure, so clearing the market shouldn’t be too much of an issue (the outstanding is trading at 6.37%).

But Intrum has had a few missteps of late, as 9fin’s Owen Sanderson writes in Excess Spread.

Essentially, the debt purchaser has had to aggressively mark down a huge Italian NPL portfolio it co-owned with Intesa, the seller, and CarVal, following CarVal’s sale of its position.

It took a €200m+ writedown on this portfolio at the end of September, and a further €284m hit when it marked to market this week following CarVal’s exit. Intrum’s position is now worth just €17m.

The basic issue is a large government-guaranteed securitisation sitting above the Intrum/CarVal exposure, and hoovering up all cashflows until at least 2025. Intrum can’t afford to consolidate this securitisation debt on balance sheet, so needed a co-investor to bought out CarVal, and the price was decidedly unfavourable. Buy with lots of leverage, and it magnifies downside as well as upside.

More embarrassing is the cost to get out of an option CarVal had. Essentially this would have obliged Intrum to clean-up the CarVal stake at a markedly more favourable price, set during a more benign market period. It has cost the Swedish company €92m to tear up this contract (CarVal sold its position for just €10m).

For a full rundown of live and recently priced deals, see the weekly deal tracker at the end of the wrap.

“Ring, ring, why don’t you give me a call? Ring ring, the happiest sound of them all!” – Abba

In a previous life (one that admittedly ended mere months ago), yours truly was a jobbing emerging markets correspondent. I was reminded this week of a minor stooshie that erupted earlier this summer, when Garanti Bank – one of Turkey’s top lenders – failed to redeem its Tier 2 subordinated bond on the call date.

It seemed fair enough: given where funding costs were at the time, it just didn’t make sense to issue new debt to replace the notes. But the unwritten rule – subs get called – had been broken. Tier 2 bonds across the EM universe were punished for Garanti’s sins, while new subordinated bank bonds struggled to find a home.

With this in mind, the decision by Aroundtown (and subsidiary Grand City Properties) not to redeem €569m worth of perpetual hybrid notes on their January 2023 call date did not come as much of a surprise. Nor did the ensuing sell-off in other real estate hybrids.

Under current market conditions, calling the bond would be “uneconomical”, the German real estate developer said, adding that it would decide on whether it would postpone coupon payments closer to their due date.

Aroundtown’s 3.75% perpetual notes dropped more than 20 points on the news to 54.5, before rebounding to around 66 cents. Meanwhile, the move prompted a four- to eight-point selloff in hybrid real estate bonds more broadly, according to ING Bank analysts. Real estate hybrids are now “bidless”, one bond trader told 9fin.

From an IFRS accounting perspective (and for the purposes of Aroundtown’s covenant calculations), the hybrid bond will retain its equity treatment. Also important, the company’s BBB+ rating from S&P will not be negatively affected.

Generally speaking, the rating agency treats hybrid bonds as 50% equity/50% debt, unless they are not repaid on their call date – in which case they lose the equity, leaving the notes (at least from S&P’s perspective) as effectively expensive senior debt.

As an aside, it feels somewhat counterintuitive that equity treatment should be removed due to a failure to call – surely the act of not calling a hybrid, or deferring coupons, demonstrates the fundamentally equity-like nature of the instrument? Your thoughts are welcomed…

Nonetheless, while the issuer-level credit rating may be safe, the 3.75% perpetual notes are rated BBB-. One wonders if the individual hybrid instrument itself may face downgrade into junk territory when the call date passes (and also, whether this actually makes any difference)?

The risk of further uncalled hybrids is on the rise, according to the ING Bank analysts, possibly bringing some interesting relative-value opportunities along with them:

“The lower the coupon (or more exactly the lower the initial credit spread component of the initial hybrid issue) the less likely the issue will be called in the current high yield environment. (This should lead to anomalies on issuer curves).”

Your correspondent was in New York last week. Recovery from Thanksgiving dinner is still in process, but at least that’s given some time to mull over Vallourec’s Q3 2022 earnings – sales up 53.6% YoY, EBITDA up 54.7% and leverage down 0.2x to 2.8x.

S&P was sufficiently impressed to upgrade the French steel tubes producer to B+, while Vallourec’s €1.023bn 8.5% 2026 senior notes have bounced nearly two-and-a-half points to be quoted close to par today.

Indeed, there are lots of things to like about what Vallourec has done since its 2021 restructuring, one bond investor told 9fin, who pointed to the added transparency the company is providing by breaking out the earnings of its Brazilian mining operations and the agreement of social plans facilitating cost-saving redundancies in Europe.

The upgrade sets Vallourec up rather nicely for a potential refinancing of its notes next year – the bond is callable from 30 June 2023 – or in early 2024. But the investor cautioned against swigging too much Kool-Aid: the rating upgrade appears more than a touch generous, they said, particularly in light of Vallourec’s free cash flow (negative €81m in Q3).

As the company points out, the negative FCF is the result of large working capital outflows and a build-up in inventory – something S&P enthuses on in its rating report: “We don't view this negatively but see it as a demonstration of the healthy environment, with the recent outflow potentially turning to a material inflow if demand softens.”

But while working capital can indeed be unwound if demand weakens, that scenario would also see a concurrent drop in earnings, said the investor, who added that liquidity of around €700m, in the context of a company with very large working capital swings, may not be the huge number it appears at first blush.

Meanwhile, Vallourec’s new up-to-€210m ABL facility will likely rank ahead of the senior facilities (including the bond and Vallourec’s now repaid RCF). Coupled with €306m of Brazilian OpCo prepayment facilities, the amount of debt ranking ahead of the bonds may be on the upswing.

By 9fin calculations, if the ABL were fully utilized and debt is otherwise unchanged, some 27% of Vallourec’s hypothetical €1.944bn total debt would be structurally senior to the bonds.

Food for thought - which hopefully doesn’t take as long to digest as last week’s monumental dinner.

This Week's LevFin Wrap includes our European Deal Tracker. Please get in touch if you would like a copy of this or any of the articles mentioned in this edition. 

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