In fact, as we will detail below, borrowers have increasingly been factoring the possibility of a rate hiking pause — or even a pivot — into their choice of which instruments to offer the market. If this week’s US Federal Reserve and European Central Bank statements are to be taken on face value, the idea there are plans for an actual pivot on rates in 2023 feels fanciful. But a clear line of divergence is opening once again between the two central banks, with the Fed looking to proceed less hawkishly in the throes of a US regional banking crisis.

Beyond the sudden influx of new primary bond offers, perhaps the most surprising feature of Thursday’s trading session was to see the euro slump against the dollar (from $1.11 down to $1.10) on the back of the ECB’s decision to mimic the Fed in a 25 bps hike. As one buysider noted, this suggested a good number of market participants had still expected the ECB to proceed with 50 bps.

But there was a big gulf in messaging as ECB President Christine Lagarde gave no grounds for encouragement that hikes will pause in June — unlike Fed Chair Jerome Powell who hinted at a June pause to assess market conditions. Unless other factors come into play, that should in fact support further appreciation of the euro against the dollar — and Friday’s session has duly brought some recovery back up to $1.105.

Secondary high yield credit markets also regained some composure on Friday after spreads widened in the earlier part of the week. The iTraxx Crossover narrowed in by eight bps during the session to 459 bps, but still stands around 25 bps out from where it began the week on Tuesday. The iShares Euro High Yield Corporate Bond ETF slipped around half a point from 90.1 to 89.6 in early trading this week, but is back up to 90 today.

As well as jumpiness around the Wednesday-Thursday central bank meetings, investors had been trying to gauge the contagion potential for problems in US regional banking.

The sight of JP Morgan on Monday swallowing First Republic did little to stop a slide in other regional banking stocks, with PacWest Bancorp worst hit with a 75% drop in stock by Wednesday — its lowest valuation for over 20 years. The iTraxx Senior Financial CDS index pushed out by 18 bps by Thursday to 205 bps as memories of March’s Credit Suisse and SVB-induced panic were stirred — but even that index has edged back in to 202bp at time of writing.

It is exactly this US banking drama that has investors feeling oddly more confident the Fed will bring an end to hikes from June, with the probability of no rate raise next month surveyed among economists at around 85%. But inflation remains sticky on both sides of the pond, and the central bank mantra remains “higher for longer”. And while daydreaming of a pivot might soothe borrowers and investors alike, there’s no comfort to be gleaned from precedents for such U-turns.

“You should be careful what you wish for on a rates pivot,” warned the buysider surveying the market reaction this week. “The previous times the Fed opted to do this were in 2020 during the pandemic, in 2007 and in 2001. In each of those cases they started with a 50 bps cut because they were in a panic. Either we were in recession or about to go into recession.”

Right now though, leveraged finance borrowers will take what cheer they can from more favourable issuance conditions — which certainly look much better than some had to endure to get deals over the line back in H2 2022. A further positive signal in Europe this week is that inflows returned (albeit thinly) to high yield bond flows — welcome timing even if US high yield fund outflows persist.

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FRNs with benefits

The rates outlook is clearly front and centre for corporate CFOs looking to tap the primary market. Floating rate issuance has been on something of a roll recently, noted a second buysider. Putting some quantitative flesh on this anecdotal skeleton, the last few weeks have seen five euro-denominated FRNs tranches issued, out of the total of 15 floating rate tranches issued in total so far this year.

Euro-denominated FRNs issued in 2023 year-to-date

Source: 9fin

Some issuers look to have been hedging their bets on rates, issuing multi-tranche deals with both fixed and floating components, said the buysider. For example, German specialty chemicals company CABB (B3/B/NR), German off-patent pharmaceuticals business Cheplapharm Arzneimittel (B2/B+/B+) and Travelodge (B3/B-/NR) all recently placed deals with both fixed and floating rate elements.

Looking at CABB and Cheplapharm — which both issued their floating and fixed tranches with the same maturity, currency and seniority — it appears there was a willingness among issuers to pay a slight premium today in order to benefit from future rate declines.

Three-month Euribor stands at 3.275% at time of writing. CABB issued its €420m 8.75% 2028 SSNs at 100 and its €250m E+525bps 2028 SSFRNs at 97.5, while Cheplapharm placed its €425m 7.5% 2030 SSNs at 100 and its €325m E+475bps 2030 SSFRNs at 99.

Others appear to be wagering that rates are near their peak, plumping for pure floating exposure. These include Italian pharmaceuticals packaging company Bormioli (though, bear in mind the technical problems that make it difficult for Italian issuers to raise syndicated loans, resulting in frequent FRN issuance) which placed €350m of E+550bps 2028 SSFRNs at 95.5. Meanwhile, Polish debt purchaser KRUK priced a €150m E+650bps 2028 FRN at par.

Borrowers breeze back after brief lull

The primary market notched up two days of recuperation time after the European long weekend, but issuance prospects then returned in force on Thursday led by Copeland’s offering of a euro-denominated piece in a much broader package of US dollar bonds and loans.

“We're hearing three-to-four bond deals are expected to come next week,” said the second buysider speaking on Thursday. “We weren't expecting that much this week — but then Copeland came — which is huge.”

Copeland is a spin-out of Emerson’s heating, ventilation, air conditioning and refrigeration (HVACR) manufacturing division. As noted by 9fin’s credit team, in 2022 Copeland generated around $5bn in sales and $1.4bn of adjusted EBITDA (a 27% margin).

Copeland priced the ¢455m December 2030 notes at par for a coupon of 6.375%. This was slightly outside the 6.25% predicted earlier by the third buysider, but inside the 6.5% area guided by the leads. The much larger $2.28bn same-tenored USD tranche came at 6.625%, in from talk in the high 6% area.

“I heard that the USD piece was 2.5x covered [Thursday] afternoon,” said the second buysider. “Take this with a pinch of salt, but it looks to have been well received. […] It looks like there's a really good slug of equity in there.”

Alongside a $2.75bn term loan B, also due 2030, the financing will fund Blackstone’s acquisition of a majority stake in Emerson’s Climate Technologies business for a $9.54bn purchase price and $14bn enterprise value. The new sponsor’s equity contribution includes $2bn of convertible PIK preferred equity and $2.34bn of common equity. Emerson is retaining $1.91bn of common equity and investing in $2.25bn of HoldCo Seller PIK Notes due 2033. Following the transaction, Blackstone will own a 55% stake in the business, whilst Emerson will retain a 45% minority stake.

“The deal isn't really new as it’s last year’s M&A,” said the second buysider. “The business was a cash cow before and I don't exactly know how it works as a standalone, but Emerson is a household name in the S&P 500. So the fact Emerson is retaining 45% is great news. People seem to be viewing it as buying a IG credit at a HY valuation.”

Engineering its way out of hung loan backlog

Engineering Group, the Italy-based specialist provider of IT and software services, is offering €385m of Senior Secured Notes due 2028. While this deal’s appearance in the primary market on Thursday surprised some investors, it has long been flagged as a necessary transaction and looks to bring closer to an end the big overhang of corporate loans financed when markets were much rockier back in H2 2022.

In September 2022, Engineering Group closed the acquisition of Italian IT consulting provider Be Shaping the Future for total consideration of €441m (excluding €24m of fees). The acquisition was funded by a €385m Bridge Facility, €15m of cash and €65.1m of equity reinvested from existing Be shareholders and management. The company will use proceeds from this offering, along with €11m of balance sheet cash, to repay the €390m acquisition bridge facility (of which €5m is accrued and unpaid interest) and €6m of transaction fees.

9fin’s credit team sees close HY comparables — take Almaviva, BIP, and Lutech — as predominantly based in Italy, with similar geo-specific risks and local industry drivers. We believe the new notes will price closer to Engineering Group’s existing SSNs yielding 9.9%-10%. 

One prominent risk factor for investors to mull is Engineering Group’s previously disclosed accounting errors — Per the OM, these led to the company restating operating profit and assets by €10.9m in FY 22. The group also reported an overstatement of balance sheet assets of €46m as of 1 Jan 2022. These accounting errors were the result of intentional misconduct by certain members of management in the Finance vertical.

Meanwhile Ziton A/S has mandated Pareto to arrange a series of fixed-income meetings for a five-year senior secured bond of up to €275m. The offshore Wind farm services business restructured its debt in September with Permira as new controlling shareholder. Ziton and Siemens Gamesa last week signed strategic agreements extending the current charter of their Wind Enterprise vessel and will add a new charter for its sister vessel. Ziton is buying the second vessel which is expected to be operational at the beginning of 2024.

Think we’re a loan now

And in European loans Nidda Healthcare Holding GmbH, the Germany-based main operating entity of the (Stada) group, is bringing a proposed Term Loan G. S&P Global Ratings says this will likely amount to €250m and rank pari passu with, and benefit from, the same security package as the existing outstanding senior secured debt. Nidda will use proceeds to repay its €257m senior secured notes due September 2024, and to cover related transaction fees.

“The transaction is therefore leverage neutral and will further improve the company's debt maturity profile,” wrote S&P. “It has no large refinancing needs until 2025 when the remaining €237m of senior unsecured notes issued by Nidda BondCo are due.”

In October, the company lengthened its debt profile to refinance the bulk of its senior unsecured debt due in 2024, with an A&E, with a cash element. Similarly, in early 2023 the group privately placed €500m to partially refinance its 2025 senior unsecured notes. In March the company also rolled over its committed revolving credit facility.

There was a pause in leveraged loan new issuance this week. Aside from having Nidda’s offering to look forward to, investors were left to ponder some unpalatable earnings from the likes of Labeyrie — see 9fin’s ‘Sitting Ducks’ report here — and Arxada. The latter’s poor Q4 22 results prompted a near three-point fall in its 2021 Term Loan B to below 90 cents, putting it in this week’s worst loan performers.

Swiss specialty chemical business Arxada’s drop in adjusted revenues (-4%) in Q4 was mainly a result of a 10% contraction in Specialty Products Solutions (32% of revenues) amid weaker demand for vitamin B3 and pricing challenges in the Chinese market, according to management.

Conversely, the biggest upward movers in loans this week were generally from stressed/distressed company situations, with Biscuits International and Keter prominent risers.

Get a second(ary) opinion

Given the underperformance of European cash bonds versus CDS of late — likely related to the re-opening of primary — the coming week could be all about finding the right pricing level for both asset classes, as well as an appropriate new issue premium for issuers. 

More than a few investors fancy European spreads are too tight, and that the iTraxx Crossover would look better value above the 500bp mark — let’s recall it was indeed that back on 15 March amid the previous banking scares (and, admittedly, in the run-up to the semi-annual index roll). Further bank rescues and continued ECB rate hiking would add weight to this prognosis.

So borrowers are probably smart to use whatever is left of the current issuance window while they can. 

But how are those already in the market — including those who hit primary last week — faring with their deals?

Recent issuance: issue price versus current price

Source: 9fin

Generally, recent issues have performed reasonably well. The recently placed US dollar and euro notes from Allwyn (Sazka) appears to be the outperformer, having both gained more than a point since issuance, with CABB’s euro-tranche closely following behind, rising by around one point. On the other side of the coin, Travelodge’s pound sterling deal is down more than a point, while its euro notes down by about three-quarters of a point. 

However, the more prominent moves in terms of secondary pricing in the past week appear to have largely been earnings driven. 

Standard Profil surprised to the downside earlier this week when it reported fourth quarter numbers. Sales in Q4 2022 were up 27.3% YoY, yet EBITDA declined 26.0% YoY and net leverage increased by 0.8x to 6.7x. 

As highlighted in a 9fin report, the results indicate that the automotive parts manufacturer has failed to conclude discussions with customers to pass through cost increases. The company’s €275m 6.25% 2026 SSNs fell sharply on the news to 55.75-mid from 61-mid. The notes subsequently recovered marginally, to be indicated at 56.5-mid today (5 May) for a YTM of 29.0%, according to 9fin data.

Another name to disappoint was Germany-based cable company Tele Columbus, which reported results last Friday (28 April) and was a hot talking point all week. Revenues in Q4 2022 grew 1% YoY, yet EBITDA was decimated, declining 47.1% YoY.Fitch promptly put the B- rated company on negative outlook, citing “weak underlying performance as significant investments resulted in negative free cash flows, while facing a strategic challenge of adapting to a new regulatory regime”.

Tele Columbus’ sole bond, its €650m 3.875% 2025 SSNs, fell eight points to 66.4-mid following the announcement and remains around this level, for a YTM of 26.2%.

A sellside analyst described last week’s earnings call as “disastrous” and said it’s a case of strong sponsor, weak company. Morgan Stanley Infrastructure Partners acquired the business in 2021. “The question now is, how committed is the sponsor?”, the analyst continued.

The entire sector is challenged, as it requires substantial upfront Capex to lay fiber cables, but there appears so far to have been limited uptake on more expensive super-fast broadband from customers, the analyst said. France’s SFR and Altice France are other names to watch on this front.

On the flipside, one name to outperform market expectations was Irish packaging business Ardagh Group, which reported last Thursday (27 April) that revenues had grown 10.2% YoY in Q1 and that EBITDA was up 34.0% YoY. While the company’s SSNs were largely unmoved on the results, its subordinated PIK notes, issued by ARD Finance SA, gaining up to 4.5 points.

Its $1.13bn 6.5% 2027 senior secured PIK toggle notes rose the most, to 82.6-mid immediately following the results, but subsequently retraced much of the gains, to be indicated at 79.7-mid today for a YTM of 13.0%. However, the €1bn 5% 2027 senior secured PIK toggle notes have held on to the three-point rise, to be indicated today at 76.3-mid for a YTM of 12.5%.

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