High Yield primary

House of HR may have managed to price its €1.02bn seven-year 1L TLB and its €125m delayed draw 1L Term Loan at E+ 575bps with a 92 OID. But in yet another sign of how precarious new issuance markets currently are, the UK-based human resources service provider’s efforts to place €425m 7NC3 SSNs were postponed due to market conditions. Arrangers on the deal were JPMorgan, Barclays and Societe Generale.

Spanish fashion retailer Tendam yesterday (6 October) priced €300m of E+750 bps 2028 NC1 FRNs at 93. The company will used the proceeds, alongside a €141m syndicated loan and €103m in own-cash, to pay down debt by around 19%, according to press reports. Deutsche Bank, Societe Generale, BNP Paribas, Credit Agricole, ICO, CaixaBank, BBVA, IMI-Intesa Sanpaolo, Banco Sabadell led the deal.

Lastly, Swedish alarm manufacturer Verisure, a repeat visitor to the high-yield bond market, priced its €500m 9.25% 2027 SSNs at par last week after issuing IPTs in the 9.25-9.5% range. Arrangers on the deal were BofA, JPMorgan, BNP Paribas, Deutsche Bank, Morgan Stanley, Nomura and Nordea.

The SSNs refinance debt due in May, and are today (7 October) indicated at 101.1-mid in the grey market, with settlement due on 15 October. Verisure last tapped the bond market in January 2021 to fund a bumper €4.4bn dividend recap – at which time it only had to pay 3.25% for six-year money from the bond market. 9fin published its updated ESG quick take on the company yesterday. If you are not a client but would like to request a copy of our ESG QuickTake, please complete your details here.

High Yield secondary

UK Chancellor Kwasi Kwarteng’s about-turn on elements of his mini-budget – notably his plan to abolish the 45 pence top rate of tax – and his decision to publish a debt-reduction plan ahead of schedule this month, made for a relatively drama-free week in gilts. Still, a Bank of England survey suggesting UK businesses expect to hike prices at a record pace to offset higher wage bills gave the market another gobbet of bad news to digest.

Two-year UK gilt yields are down 19 bps on the week to 4.15%, five-year yields down 4 bps to 4.41% and 10-year up 8 bps to 4.21%. Meanwhile, two-year Eurozone government yields are up 4 bps to 1.82%, five-year yields up 4 bps to 2.02% and 10-year yields up 5 bps to 2.17%.

Swiss-t and Shout

In a week when US President Joe Biden warned that the risk of nuclear Armageddon is at its highest since the height of the cold war, some sections of the financial commentariat were busy drawing historical parallels with a more recent crisis – the collapse of Lehman Brothers.

Reports last Friday that Credit Suisse CEO Ulrich Koerner had sought to reassure staff in an internal memo of the bank’s strong capital and liquidity position – not long after the lender was sounding out investors for a capital increase – did everything except calm the markets.

On Monday, the scandal-prone bank’s CDS hit 293 bps – up 55 bps YTD – prompting lots of talk about a 23% probability of default in the next five years. Yet the rationale for such cataclysmic chatter appears riddled with as many holes as a block of Swiss cheese.

As more sober voices noted, the loss-making bank’s capital ratios remain robust. CET1 was down 30 bps to 13.5% at end-2Q22, compared to a regulatory minimum of 9.6%, said ING Bank in research published Monday, while the liquidity coverage ratio is “strong” at 191%.

Where management words failed, actions appear to have worked – a CHF 3bn bond buyback announced today appears to be calming frayed nerves. At time of writing, Credit Suisse’s five-year CDS tightened by 22 bps today to 327.5 bps, while zero-month CDS tightened 70 bps to 602 bps. although the ongoing curve inversion suggests the market still senses trouble ahead.

Further outflows, but HY moves focus on idiosyncratic stories

Looking past such excessive noise, moves in European high-yield credit appear relatively constrained this week, with big moves reserved to a handful of idiosyncratic credit stories.

This is despite another week of HY fund outflows – USD 953m from global HY, USD 531m from US HY and 392m from EHY, according to BofA research – the largest outflow in 13 weeks. “As we have been saying for some time now, we struggle to see high-grade and high-yield funds outflows reversing anytime soon,” the BofA analysts noted.

“Not only is there not that much of a need to own high-grade credit for yield (as ‘risk-free’ rates are rising rapidly), but amid a challenging macro backdrop (and ultimately higher default rates), we struggle to see how credit investors can add beta via high-yield bonds,” the analysts continued.

The biggest underperformer in the European high-yield space was Luxembourg-headquartered Metalcorp Group, which announced Monday it was unable to redeem its EUR 70m SUNs due that day – largely due to a term loan provider “reneging” on €30m of funding. S&P Global Ratings subsequently downgraded the company to SD from B.

The company’s 2026 SSNs plummeted from 81-mid to 37.5-mid on the news, before retracing some losses to be indicated at 42.9-mid today. The bounce followed a bondholder presentation yesterday in which management outlined a plan to repay the 2022 SUNs which largely rests on the company’s ability to monetise its stockpile of bauxite in Guinea.

9fin’s write-up of the investor call can be read here.

Another European credit to see selling pressure across the curve this week was United Group, a telecoms and media operator focused on eastern European markets. The moves were the result of “European bank and hedge fund selling”, according to a research note produced by European High Yield Online.

The STW on its 2024 SSNs rose 2.7pp to 9.8%, while the STW on its SSNs maturing between 2026 and 2030 rose 0.8-1.3pp. However, the biggest falls came in its 9% 2025 senior PIK toggle notes, which dropped 9.5 points in cash terms, for a STW of 24.7%.

Italian power plant construction firm Ansaldo Energia, whose €350m 2.75% 2024 SUNs dropped 18 points on the week to 78.9-mid for a STW of 16.4%, which may be a delayed reaction to a Bloomberg report in late September suggesting that the Italian government may have to stump up cash for a fresh equity injection following gas writedowns.

Other names to face selling pressure this week were German home shopping TV network HSE24, pan-European precast concrete business Consolis, UK insurance firm Saga and Italian paper manufacturer Pro-Gest, which at time of writing had all gained 1.5-3pp in STW terms this week.

South African paper manufacturer Sappi launched a €150m buyback of its 2026 SUNs, Italian payments company Nexi repurchased €349m of its 2024 SUNs and €124m of its 2026 SUNs, while Aston Martin is wrapping up today its up-to-$200m tender of its 2025 SSNs and 2026 2L notes, with the latter dropping over two points today.

Leveraged loans primary

This week, the sellside suffered yet another blow. House of HR, a stable credit that many buysiders liked, crossed the finish line with just 60% of its €1,020m TLB (B2/B) covered.

As reported by 9fin, around half of a €310m second lien loan (Caa1) was covered in the transaction, according to buyside and sellside sources. Leads finally confirmed on Wednesday that the sale of the company’s bonds was indeed postponed.

The TLB priced at E+575 bps with a 92 OID, down from price talk of 94, while the second lien was guided to pay a 9% margin with a 94 OID.

The debt financing launched on 21 September, after extensive pre-marketing, which saw several direct lenders look at the deal and two decline it, as reported.

The capital structure brought to market this September took net debt to 5.8x, based off marketing EBITDA (to June 2022) of €327.2m. Pre-transaction, the net leverage was 4.04x in June, according to its Q2 2022 investor presentation.

Dutch artificial grass provider TenCate Grass (TCG) suffered a similarly difficult fate, after its seven-year €274.3m fungible add-on (B2/B) was pulled this week. The financing supported the acquisition of US peer Hellas.

Margin guidance was E+500 bps and 90-91 for the OID, from initial price talk of 92-93, reflecting the tough market conditions.

Investors balanced the company’s solid performance against its high leverage and volatile macroeconomic environment, which clearly won the day.

TCG has 4.73x total net leverage based on €135.3m LTM adjusted EBITDA through July 2022, down from 4.95x based on €127.1m LTM adjusted EBITDA through May 2022, when the acquisition closed. Buysiders polled by 9fin, however, saw leverage in the 5.4x or 6x range, after stripping out some of the adjustments to EBITDA.

“I declined. You can get some people saying that with the price, they are getting paid for the risks, but it doesn't convince me,” said the first buysider.

Due to the volatility this week in the market, sellside and buyside sentiment for primary deals has hit a trough.

“I think most people are discounting the rest of the year,” said a first sellside source. “We’re mainly monitoring the situation, because there is very little out there,” they continued.

While TenCate Grass and House of HR are by no means model credits, with leverage a sticking point for both, they boast strong performance with good liquidity.

Given TenCate Grass priced a €315m TLB paying E+500 bps at 98.5 and House of HR issued a €550m TLB paying E+375 bps at 99.88, both in 2021, the issuers must be suffering from whiplash.

Sellside and buyside sources agree, large financings are dangerous in this market, with the most likely survivors of these difficult times being well-known, stable credits with deal sizes in the €400-700m range. Verisure and Cerba were examples given by the first sellside source as issuers having a shot at syndicating in the current market.

Ekaterra, a €4.5bn CVC deal that has been floating around the market since before the invasion, could be one LBO caught in the crossfire. Bankers are still tinkering with this €2.1bn syndication.

The hung LBO deal has punchy leverage and heavily adjusted EBITDA, and has had a lukewarm reception from buysiders in pre-marketing, with some reaching boiling point over ESG issues.

A number of private equity sponsors reportedly pulled out of the deal at auction stage due to legacy legal issues, with wider social issues facing the tea industry in East Africa, including gender pay gaps, working conditions and water usage.

Buysiders have told 9fin that while the credit is of reasonable quality, ESG issues on the deal are serious and in the current market environment, some don’t think it’s worth it. See a full report on the ESG issues facing Ekaterra here.

According to LPC, a sterling-denominated €500m-equivalent tranche was taken by Asian banks this summer, at a 94 OID. Lead banks are hoping to tap as many pools of capital as they can, but one sellside source on the deal said there were no guarantees a general syndication would come before the end of the year.

As one direct lender went so far as to say: “the syndication market is dead right now.” Private deals, on the other hand, are still happening.

For example, Modulaire, the modular construction company owned by Brookfield, priced a €140m TLB, fungible basis with its 2028 €1.26bn TLB through a “private syndication process,” according to a press release from the company.

A2Mac1 is another issuer that opted for a private deal over a general syndication, even though the company was originally destined for the latter, according to the direct lender. The sale process has been won by Providence Equity, and was conducted alongside financing negotiations. The auction was expected to fetch €1-1.5bn for vendor Rothschild PE.

Arcmont, the incumbent lender on the deal, was said to be looking closely at the deal.

But even in direct lending, signs of stress from the current macro situation are showing. The direct lender said their pipeline was thin, and with their pricing already at E+700-800 bps, achieving an 11% yield, they weren’t sure if issuers could take much steeper pricing. The sellside source said some direct lenders were pushing their pricing with a 9 handle.

So it’s going to be a quiet Christmas, as issuers are chased away from the debt capital markets by yet another wave of macro volatility.

Leveraged loans secondary

The secondary market reflects the dreary macro situation, and thus every industry was in the red this week, healthcare taking the largest hit at around 0.75-point.

Keeping things light, at least for chemicals analysts, is Arxada, previously known as Lonza Specialty Ingredients. Its €302.4m and €725.0m fungible TLBs, paying a E+400 bps margin, were Europe’s best performers this week, jumping 2.7-points.

The Swiss specialty chemical business showed it was able to offset all input material prices more than dollar for dollar in its second quarter earnings reported this September. It did however see its gross profit margins slightly deteriorate.

The business reported 12.6% top line growth in Q2 22 compared to the year before, with pro-forma adjusted LTM EBITDA picking up 16.7% to CHF 538m in the same period. The company ended the quarter with CHF 45m positive free cash flow, CHF 108m cash on balance sheet and, including RCF, CHF 347m of liquidity at its disposal. Even against overall growing earnings total net leverage picked up slightly by 0.1x to 6.3x, as the company is holding less cash.

Chief executive Mark Doyle and interim chief financial officer Jan Kantowsky forecast further robust price increases in the second half of the year on Arxada’s most recent earnings call.

Particularly against US credits, the company might be a somewhat stable option as chemical companies brace investors for lower earnings, as reported. Rising energy costs and slowing demand are squeezing margins and a string of America-based chemical producers — including Chemours, Tronox, Avient and Huntsman — have recently lowered their full-year forecasts. Overall rising commodity prices, lower demand from Europe and Asia, and rising interest rates in the US are to blame.

GenesisCare’s €350m TLB took the biggest dive this week, with a six point drop. Despite the sale of its Australian cardiovascular unit boosting depleting cash, sponsors KKR and China Resources have continued to see their cancer care business struggle this year, with some observers expecting it to enter restructuring talks in the near future.

BC Partners has also taken a hit, with storage solutions manufacturer Keter being the second biggest faller this week, amid an amend & extend process which could pit lenders against each other. Its €100m TLB paying 4.25% due in October 2023 dropped 4.5 pts. A second buysider said lenders they had spoken to were negative on the process.

The company fired more than 100 employees recently, according to the buysider, who says they expect results to deteriorate in the next two months and for leverage to reach 6x by year-end.

Volumes will continue to be impacted by price increases and a lack of hedge against oil prices, to which the prices for its main input resin are derived. The buysider noted also the company sells a consumer discretionary product amid a cost-of-living crisis and post-pandemic deterioration.

The A&E process will include a covenant strip-out mechanism, which buysiders are looking upon warily.

“This could have been refinanced out way earlier if one the company had not got greedy,” the second buysider said. “Now it’s lenders who pay the price.”

Yet another BWIC graced the market this week, but it was notably larger than others seen of late. Bids were due this Thursday (6 October) at 1pm on a circa €270m-equivalent portfolio of secondary loans and bonds.

The list comprised 58 loans and seven bonds in euros, aside from 12 sterling and three US-dollar tickets. The biggest tranche was a €10.4m TLB piece of Biscuit International. The sizeable list includes other stressed names such as Zoopla, Flint and A&O Hotels.

Bankers have noticed an uptick in the number of BWICs, but have not put them down to forced sellers just yet. As 9fin reported earlier today, the latest €270m BWIC only part traded, with a number of loans marked down or trading below indicated levels.