Despite another shortened week in the UK, the European leveraged finance markets are in full spring bloom, with a double digit deal count in the market. Corporate debt deals are flying off the shelf, even though central bank rate decisions still keep investors guessing.

“Credit feels like a passenger, especially while everyone waits and guesses what central banks will do,” said one buysider.

The Bank of England hiked UK interest rates to 4.5% and now expects inflation to finish the year above 5%, still quite elevated especially compared to a under 4% expectation from February. On the other side of the Atlantic, positive news from latest CPI reading in the US balance out the negative sentiment as it came under the 5% expected level in April, at 4.9%.

That could give the Fed room to ease rates if US growth underperforms — taking some recession risk off the table.

“If you believe that a recession is coming, then the current spreads are not high enough for you and you’d ask yourself if you should be deploying capital now, if things sell-off later?” said a syndicate banker.

The revived pipeline post-Easter is still finding a supportive bid. Interest rates are closing on their peak and earnings aren’t bringing many shocks, said the banker.

“I think you can see why markets have been quite stable and issuers are coming out,” added the banker.

iTraxx Crossover stayed more or less flat for a third consecutive time. The index started the week at 449.5 bps and widened out on Tuesday to 458 bps, but was calmed by the easing in US inflation and returned to around 448.5 bps on Friday.

Bank of America’s research team also pointed out that markets are still roughly in line with where they started the year, despite much volatility in between.

“Much stress and convulsions across markets in 2023, yet carry has quietly proved to be king for debt markets,” wrote analysts in the Friday report. They noted that if investors are no longer forced by low yields and central bank repression to crowd into corporate bonds, the asset class should be more resilient overall.

But buysiders in Europe are not that constructive at the moment.

“Markets rallied quickly at the start of the year as they always do, but now we seem to be stuck in a central bank-induced no man’s land. Risk appetite isn’t as good as it was three months ago,” said second buysider.

The mood was said to be cautious but not entirely gloomy at Morgan Stanley’s leveraged finance conference where investors and issuers gathered to discuss the market and recent performance.

“There were some talks mentioning that widening of the market is a matter of time, but everybody also still sees opportunities here and there so it wasn't fully negative,” said a third buysider that attended the conference.

Buyside and sellside agree that deals can still get done, but companies are aware that they need to offer incentives to gain investor attention.

Oversubscription levels are gradually decreasing compared to when the market reopened after Easter. The syndicate banker pointed to broad participation from investors, though books are getting “slightly smaller”.

“It’s been very light in high yield this year with a dearth of opportunities to add exposure, since the yields companies now have to pay are not what they were. The market is open, but borrowers just need to price appropriately,” said the first buysider.

According to a note from Barclays research, published on Friday, from all the deals that priced this year, the simple average yield for European high yield new issue has been around 7.8%, with the rolling four-quarter average now at a new high of 8%. Looking over 2023, the bank analysts expect HY index coupon to rise to almost 5% by the end of 2024.

Coupon income could rise by 15-25% in 2024 and 2025 and will keep straining the interest coverage ratios that bank analysts argue have peaked. So the interest coverage ratios can stay at the current levels, earnings would need to rise by at least 10-20% to compensate for the increase in interest costs, according to the report.

High Yield Primary

German automotive supplier Adler Pelzer (AP) gave a stark example of the levels stressed companies have to pay to attract investor attention. At IPTs the new €350m 2027 SSNs are offering a coupon of 9.5% at a 92-93 OID, giving an all-in yield of over 11.5%.

A €120m subordinated shareholder loan has helped reduced leverage by around a turn, and as 9fin’s Josh Latham outlined in his Financials QuickTake, stretching payments to suppliers has boosted working capital and overall liquidity. (If you are not a client, you can request our full report package on Adler Pelzer here. This includes Credit, Legal, ESG and Financials QuickTakes).

There have been concerns over industry cyclicality (especially as AP doesn’t have an aftermarket business), high concentration of customers and suppliers, and constrained cash generation due to thin margins, high tax burden and increasing cash dividends to JVs, which it fully consolidates.

The deal was also helped by heavy premarketing, giving a decent order book in place at launch — with one buysider suggesting the deal had come to the market already covered, as 9fin reported earlier in the week.

Taking in the company and facility ratings, B3/B- by Moody’s and Fitch, buysiders appreciated the higher premiums.

“They will be willing to pay a juicy amount today to get the deal done, on the basis that they are betting on rates and risk appetite being better in just a year and being able to refinance at a more attractive level then,” said the first buysider involved.

The buysider was referring to the unusual 4NC1 structure. However, with over 12 points (104.75 call minus 92-93 OID) of principal repayment to put into the break-even mix, there would need to be a significant business improvement to call the deal.

Documents were tightened up markedly from the prior issuance with limited day one capacity to incur debt or to make restricted payments. A fairly robust J-Crew blocker was also added. Read more in 9fin's Bond Legal QuickTake.

However, 9fin estimates there is around €75m of basket capacity available to the sponsors, if they decide to net off some of their injection at a later date. 9fin's has also published detailed Financial, ESG and Credit QuickTakes.

Italian IT services company Engineering Group have also offered the investors a very enticing yield. A new €385m SSN due in May 2028 priced at par with a 11.125% coupon, tightening from IPTs in the 11.25-11.5% range. The bond is rated at B2/B–/BB– and will be used to repay a bridge financing that supported an acquisition of the consulting firm Be Shaping The Future.

Fitch Ratings has assigned the transaction a negative outlook because of high leverage, weak coverage ratios and lower free cash flow and forecasting that the relevant metrics will breach levels and force a downgrade to 'B' over the next 12 to 18 months.

The American staple carmaker Ford also had to pay up to price its newest euro bond. The €600m 2028 SUN came par at 6.125% even with Ba2/BB+/BB+ rating.

Ford's last euro-denominated deal came at the start of February. In comparison, the company paid 4.875% yield (4.567%/99.997 OID) for the €1bn SUNs due in August 2027. This note is still yielding 5.5% to maturity even after the new elevated print.

French mining group company Erament debuted its first five-year sustainability-linked bond to a decent success. The €300m minimum size of the SLB due in May 2028 almost doubled to final €500m. The pricing also came down from IPTs in the 7.25% area to 7% and 99 OID print, yielding 7.125%.

The US metal packaging conglomerate Crown Holdings also managed a decent upsize with its newest European bond. The final €500m size of the SUNs due May 2028 printed additional €100m of paper from the original offer and still came with 5% coupon and par, tightened from IPTs in the 5.25% area.

Another American issuer trying its luck in Europe was the automotive supplier Dana Incorporated. The €425m SUNs due 2031 priced par with a 8.5% coupon, on the tighter end of the talk between mid to high 8%. The deal size, however, remained the same this time and issuer did not push to squeeze a bigger tranche from the buysiders.

9fin has published Legal and Credit QuickTakes on the new issue earlier in the week. From otherwise straighforward covenants our legal team highlighted that the restricted payment Buildup Basket is backdated to July 2013 but there is no disclosure as to the amount of accumulated capacity.

The last American issuer in Europe to price this week was the glass container producer Owens Illinois. The company is notably responsible for one of every two glass containers made worldwide and the deal was well received as it managed to increase the issue by over $300m-equivalent from the combined initial amount of the euro and dollar pieces.

The €600m (upsized from €500m) SUNs due 2028 came at 6.25% yield, tighter from the initial talk in the mid to high 6%. The $700m (from $500m) SUNs due 2031 priced at 7.25% yield, also tighter from the IPTs between mid to high 7%.

ION Group-owned Cedacri came with a dividend deal, offering €275m SSFRNs due 2028 to fund a €150m shareholder distribution. The new debt will also be used for a €50m tax payment, which benefits Cedacri through tax savings.

The company increased the deal by €25m from the original €250m amount. The price talk on the E+550 bps note has meanwhile tightened to 93.5, from IPTs in the 92–93 range.

The facility is expected to carry B3/B/B- ratings. Fitch Ratings has put the company on negative outlook because of the new issue because of higher leverage post issue and higher cost of servicing it debts despite solid trend in profitability, writes the agency. 9fin has published Legal and Credit QuickTakes on the new issue earlier in the week. (If you are not a client but would like to request our QuickTake package on Cedacri, please complete your details here).

Note: 9fin competes with ION, Acuris and Debtwire in providing financial news and information

Leveraged Loans Primary

Leveraged loans primary remained muted compared to the string of new bonds, with only a €150m add-on from UK's Modulaire publicly marketed, though a private placed €100m add-on for Optigroup also slipped out.

Modulaire's fungible deal is guided between 94-95 OID and paying E+450 bps. The new loan from the modular workspace provider will be mostly used to pay for the acquisition of the domestic peer Mobile Mini UK. Modulaire paid £335m (around €378m) on 31 January for the asset in a deal that was leverage neutral and partially funded through a €46m equity injection.

The new capital structure is based on a €571m Pro Forma Run Rate EBITDA LTM to December 2022 that gives 4.9x senior secured net leverage (from 4.6x level pre transaction) and 6.2x total net leverage post IFRS-16 (unchanged from 6.2x).

When Modulaire came in the market in the middle of February 2022 with a €250m add-on, the move shocked buysiders, as the proceeds were earmarked to pay down a previously undisclosed Holdco PIK. This surprise overshadowed somewhat the credit strengths of the company, as reported at the time. The deal still managed to place at the tight end of 97-97.5 talk with 97.5 OID paying E+450 bps, just before the Russian invasion of Ukraine paused the markets.

The newest add-on seems likely to come without such a plot twist, find out more in the preview of investor sentiment early next week, prior to commitments on Tuesday (16 May).

Another test for loan appetite due to price next week is the new A&E from the Dutch specialty chemicals business Nouryon. The company is aiming to push out maturities on a minimum of €1.2bn of its existing €1.7bn TLB and at least $2.5bn from the $3.2bn loan, both due in October 2025. The new maturity date would be in April 2028.

“It is definitely interesting amount, I am not entirely sure what the appetite is,” said the second buysider. “It is a partial A&E, so they are trying their luck.”

The Carlyle and GIC-owned business is a regular issuer with a large capital structure, and was last in the market in early March, raising a new $750m January 2028 TLB to fund a planned $500m dividend. The loan came at tight end of talk at S+ 400bps and 98 OID.

At the time Nouryon was leveraging up to 4.6x total net from 4.2x level. This time leverage is ticking up once again but only slightly, coming to 4.9x total net level from 4.8x pre-transaction. The new capital structure is based on $1.252bn Q1 23 LTM Pro Forma Adjusted EBITDA, coming down from the $1.287bn marketed figure in March.

Swedish B2B distributor OptiGroup decided to opt out of public syndication and announced its €100m add-on already placed with the investors. The loan came at 93 OID paying E+525 bps, in line with the existing tranche. The new full pro-forma size of the tranche will be €465m.

The company was presounding the deal since February, as first reported by 9fin. The transaction will repay drawings on its €60m RCF following recent acquisitions.

Movers & Shakers

Swedish property management company SBB (Samhallsbyggnadsbolaget) was the biggest loser in high yield this week.

The €500m senior FRNs due in August 2026 were down over seven points in a week comparison, sliding down to a 66-mid quote and breaking the lowest level record from June 2022. At the time Viceroy Research published a report accusing the company of inflated asset values with SEK 14bn liabilities outside of its balance sheet, accusations which the company rejected.

The longer dated €750m senior note due in August 2027 paying 1% fell 5.4 points to 62.8-mid quote this week.

SBB has been downgraded this week by S&P Ratings on long- and short-term issuer credit ratings to BB+/B from BBB-/A-3, respectively, out of investment grade. The agency highlighted high leverage, tightening liquidity and lack of improvement in the first quarter after closing a large stake sale to Brookfield.

The German commercial real estate company DIC Asset is also on the list of the struggling bond issuers this week. Its €400m senior note due in September 2026 that pays 2.25% has fallen 2.6 points to below 57.

The move comes despite the company coming out this week with positive first quarter numbers. The sales were up 108.5% Y-on-Y and EBITDA up 54.1% in the same period helping to cut net leverage by 1.8x to 13.1x compared to the previous quarter.

On Thursday earnings call management disclosed that it came to the syndicated loan market for €505m of financing during the first quarter. The company further revealed under questioning that just two assets (worth €12m-€13m) remained unencumbered.

The syndicated loan (from undisclosed lenders) was for a seven year term and paid 4.48%. The company is still facing significant debt maturities in late 2023 and early 2024 amid a sharp slowdown in German real estate transactions in Q1 23.

During the quarter, the group refinanced 45 properties at its VIB subsidiary level (for €245m in total), which extended the average debt maturity to 3.8 years. Read more in Chris Haffenden's write up of the earnings.

The best performer between European bonds was the German health, nutrition and beauty retailer LR Global. Its €125m SSFRNs, maturing in October 2025, picked up almost 4.3 points to 96.3-mid quote this week to their highest level since last September. The company has released preliminary first quarter numbers at the end of April showing an increase in sales by 5% year-on-year.

Troubled French supermarket chain Groupe Casino saw a bounce in its bonds, though they’re still trading at deeply distressed levels. Its €900m senior notes due in August 2026 paying 2.798% rose 3.8-points to 25.5-mid quote. 9fin reported this week that the company has picked Houlihan Lokey and Freshfields as financial and legal advisors. The appointments come ahead of the deadline for creditors to provide their consent to waive an event of default if the company decides to go into a conciliation process. Lenders are represented by PJT as financial advisor.

According to an article published this week by La Lettre A, Daniel Kretinsky is in the process of finalising the terms of his offer to Casino's unsecured bondholders, in which he is offering 35-40% recoveries.

Spanish biopharma Grifols impressed investors at the start of May with a new deleveraging plan and its €1.4bn senior notes due in October 2028 picked up 3.7 points to 83.7-mid quote this week. The plan aims to deleverage from the current 7x level to around 4x in FY24, with €1.9bn of high-yields bonds (SSNs and SUNs) due in February 2025.

HY price decreases

HY price increases

The loan secondary market was on a diverging path this week when looking at loans through the industry optics. The consumer staples led the green sectors with a 0.15-point increase while communication services suffered the most with an over 0.1-point fall.

Bids were due on Wednesday for a €240m BWIC combining portfolio of loans and bonds. The biggest tranche was a €8.25m slice of MTD Group €425m TLB. due in July 2025.

A full list of positions is reproduced below.

The French engineering group Expleo has seen its €494.4m September 2024 TLB paying E+425 bps up 4.2 points to new 94 quote, the highest level since last June.

The loan from UK e-commerce business, The Hut Group suffered after news broke on Friday that talks with Apollo were off the table. The €600m TLB due in December 2026 paying E+450 bps lost over two points in the week to be quoted at 90.1-mid. Shares in the company were down 15.6% on Friday and down 42% on the week.

Judging by CEO Matthew Moulding's post on LinkedIn, he is most probably not willing to accept any private equity offers, said a buysider.

“They said they will be cash positive in 2024 but that is a long wait and not for sure,” said the buyisder.

The company has been burning cash and driving down margins and with leverage over 7x it is hard to see any positive catalyst soon, concluded the buysider.

Luxembourg-based funds administrative provider Alter Domus is now paying a new ratcheted down margin of just E+275 bps on its euro loan in Q4 22 after EBITDA growth pushed first lien net leverage down to 3.0x, as reported.

EBITDA climbed 15% YoY to €167m, but its margin contracted from 31% to 28% on higher non-labour overheads. Revenues, meanwhile, also ballooned, up 30% YoY to €605m, of which 23% was organic growth — this is up 6% on budget. Total leverage came at 4.2x including €78m of leases.