Market Wrap

LevFin Wrap — December issuance glut; Man GLG expects limited defaults; Another real estate short

David Orbay-Graves's avatar
  1. David Orbay-Graves
8 min read

Having decamped to Turkey for December, your correspondent feels somewhat disconnected from what looks to be a bumper close to a difficult year for LevFin markets (though, truth be told, this detachment probably has more to do with the never-quite-empty raki glass by my side than the three-hour time difference with London).

Between the Turkish grog and the hangover fog, 9fin found time to catch up with a senior LevFin banker earlier this week, who forecast the tally for leveraged loans and high-yield bonds priced in December to reach 23 – of which roughly 80% are refinancing transactions in one shape or another. “Big picture, it’s been an incredible December.”

While the raw number is encouraging, there’s a definite sense of bittiness, given many of these deals (though not all) are on the small side. Just this week French shelf manufacturer Stow (formerly Averys), Belgian website hosting platform and French real estate services company Emeria all priced sub-€100m TLB add-ons.

All the above will use proceeds to take out their RCFs and put some cash on the balance sheet for general corporate purposes. On the chunkier side, Spanish theme park operator Parques Reunidos took the chance to bring down its cost of borrowing by refinancing debt it raised at the height of the pandemic (clients can read Laura Thompson’s deal preview here or you can request a copy here).

Leveraged Loans Issued In December 2022

Source: 9fin Screen

High Yield Bonds Issued In December 2022

Source: 9fin Screen

Incidentally, bonds issued this month have performed quite nicely in secondary too – three out of the four we have pricing data for are trading a point or two above their issue price.

Here at 9fin Towers, we wondered whether the swathe of deals to refinance RCFs immediately prior to year-end might be a bank-led initiative as much as an issuer-led one.

We were swiftly disabused of this notion by those in-the-know: markets remain volatile, are likely to remain so next year, and borrowers are opportunistically taking advantage of an issuance window to extend maturities and bolster liquidity, according to the banker.

Markets are in a massively different state than they were just two-and-a-half months ago (case in point, House of HR placed a €415m bond this week that it failed to get away back in October, while underwriting banks cleaned up their holdings of its TLB with a follow-on loan offering).

As such, it makes sense to “make hay while the sun shines”, the banker said.

Rating agencies are increasingly pugnacious towards issuers who haven’t planned their refinancings 12-18 months ahead, the banker said, so getting ahead of the curve is crucial. And it is doubly important for listed companies to avoid being crowded out: equity markets currently value cash and liquidity, and “you don’t want to be a public company with a maturity problem and facing a downgrade”.

The issuance window is likely to remain open in January at least, and there should be a “nice level of activity” in small refinancing transactions, the banker said. However, the pipeline of major M&A-led deals remains anaemic and even if auctions kick off in January, that will not result in new debt supply until May or June.

Man GLG shares thoughts for year ahead

9fin took the opportunity to discuss the outlook for the year ahead with Michael Scott, lead portfolio manager focused on global high yield and credit opportunities at Man GLG. Scott shared some thoughts on the year ahead in credit and, while recognising the challenges ahead, overall struck an optimistic tone…

9fin: Will new issuance pick up in 2023?

Scott: New issuance markets won’t be back open for everyone next year by any stretch, as we’re heading into a global recession – they will generally be closed to all except those high quality, cash generative businesses. However, the maturity schedule for next year is not too onerous. Those issuers unable to access the market, the more stressed or undercapitalised businesses, alongside their creditors, will need to be more proactive in addressing their maturities. This means we may see more ‘amend and extend’ type transactions, and in the more severe cases a bond restructuring.

9fin: What restructuring triggers do bond markets face?

Scott: The triggers for bond restructuring will really be maturities, which don’t ramp up until 2024/25, so we’re conservatively estimating defaults to be in the mid-single digits for Europe. In the US, we expect it to be slightly higher, in the high single digits.

But the default rate is likely to be lower than in prior recessions – such as the GFC and or when the dot-com bubble burst in 2000 – because many businesses came out of the post-Covid rebound in pretty robust shape. Many are better capitalised now than they would be expected to at the end of the cycle, as they didn’t spend much on Capex or dividends after the pandemic, so leverage has come down over the period.

9fin: What sectors are best placed to ride out a recessionary environment?

Scott: We think the gaming sector is particularly well placed to weather a recession as it contains some stable, highly cash-generative businesses, and we don’t imagine they will see faltering demand. The sector appears attractively priced here, with yields not reflecting the underlying fundamentals.

Regulatory risk is always a concern and understanding the ability of a business to withstand such changes is important – for the gaming sector we see regulatory risk as being more important than cyclical risk. But while the regulatory changes expected in the UK, or more general regulatory change in Europe, might be problematic from an equity perspective, from a debt perspective these are well capitalised businesses that we expect can manage the stake limits being introduced.

Other sectors we expect to manage a recessionary environment well are consumer staples and supermarkets – some of the supermarkets also have hard assets backing the bonds. On the other hand, cyclical business such as capital goods, automotive and consumer discretionary may have a tougher 2023.

Thanks again to Michael for sharing. We love hearing divergent views on the markets — credit or otherwise — so do drop a line if you’d care to share.


European real estate hasn’t had a good ride lately. Restructuring lawyers and advisors regularly put the sector at the top of their watchlists – fundamentally, if financing costs start exceeding real estate yields, these businesses need to rethink their capital structures. Even investment grade names are now having to make tough decisions — Aroundtown’s announcement it would not be calling its hybrid continues to be a talking point.

Meanwhile, a string of short-seller reports focusing on allegedly dodgy dealings in the industry adds a sprinkle of idiosyncratic risk to an already stressed sector.

The industry does appear to be something of a related-party soup (one which 9fin will look to keep untangling over the coming weeks). But to play devil’s advocate for a moment, is this so surprising? Real estate does appear particularly cosy, but – as in any industry – the key players inevitably know, and work with, one another.

In conversations with various analysts, the general view is that shareholder shenanigans make for great clickbait but when push comes to shove, what matters as a bondholder is your coverage level. As such, the key things to watch out for are inflated asset valuations.

Which, unfortunately for Vivion, was prominent among the litany of accusations levelled at it by short-seller Muddy Waters this week. Clients can read our summary of the short-seller’s report here or request a copy here. For its part, Vivion responded by saying Muddy Waters’ report contains “numerous factual inaccuracies, provably incorrect statements, and flawed conclusions” and promised to deliver a more fleshed-out rebuttal in due course.

As an aside (and a thought shamelessly lifted from FinTwit): this appears to be Muddy Waters’ first foray into pure credit – Vivion doesn’t have listed equity. Could the entry into debt market of the “big daddy” of short sellers (as 9fin’s Owen Sanderson pithily dubbed MW in this week’s Excess Spread) mark a brave new world for idiosyncratic risk in credit?

Analysts are now scrambling to come up with revised models to put a floor under Vivion’s unsecured bond prices. The work is complicated by the fact the company only owns just over half its German portfolio, as well as the need to unpick which assets exactly are encumbered and what their true values may be.

Following publication of the report, both Vivion Investment’s €700m 3% 2024 bond and its €640m 3.5% 2025 bond, both senior unsecured, tanked to be indicated at 71.75/73.1 and 70.4/72.9, respectively, having been quoted at 88.7-mid and 84.3-mid the day before. The notes have recovered a few points today.

Vivion isn’t the only real estate firm to have been targeted by the shorts lately.

Late last week, Viceroy Research published an update to its research on Sweden’s Samhallsbyggnadsbolaget (SBB), arguing that the spinoff of is SEK 45bn (€4.1bn) school property portfolio, to a newly formed JV with Canadian asset manager Brookfield, was made at a significant discount to book value.

Regardless, SBB’s bonds were largely unscathed. Indeed, more broadly bonds in the sector have held up reasonably over the last month. Excluding distressed credits (STW > 20%), a screen of real estate issuers with EUR-denominated bonds outstanding shows average STWs of 9.2%, down 40bps from 9.6% one month ago.

And alongside the negative news flow for the sector, there have been more positive developments for bond investors – largely coming in the form of fresh equity support.

As 9fin reported on ThursdayPeach Property Group will be able to take out its €181m-outstanding 2023 SUNs without touching its RCF following the issuance of a CHF 63m mandatory convertible note (largely subscribed to by existing anchor shareholders). Meanwhile, Signa Development (itself caught up in shareholder drama earlier this year, when the company owner’s offices were searched by police) raised hopes of bond buybacks on its earnings call in late November, following a €200m equity infusion earlier in the year.

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