The mood is as sombre as the weather in European leveraged finance this week.
Credit Suisse is making deep cuts in its European leveraged finance team, and it’s not like the rest of the Street has had a great year either. One banker said their team was not hiring and doubted whether any other shops were. Finding seats will be especially difficult for senior members of the CS team, who likely come with a significant price tag.
The loss of one of Europe’s “great LevFin houses,” as one market source called it is a great shame, but even where the jobs are more stable, the mood is pretty dismal, as primary issuance remains extremely muted. Even the rally driven by solid US CPI data the previous week has not improved prospects much for the rest of the year.
A LevFin origination banker said that even though bonds seem to be the safer option for any potential refinancing, with a deeper pool of liquidity in Europe than loans, it’s a struggle to convince issuers to opt for fixed rate notes.
A second banker characterised this year’s primary issuance as operating in windows, and while bonds had their moment last month, with Verisure and Fedrigoni offering refinancings, now it is time for loans to shine. In this window, deals coming to market have been smaller — Emeria (formerly Foncia) for example, has opted for loans for its €300m add-on. CLO buyers may value liquidity (and therefore tranche size) less than their bond fund peers.
Some issuance is, however, sneaking in before the December drought. UK-based credit card provider NewDayannounced a new 13.25% SSN offering on Friday. At the same time, NewDay is offering to exchange 90% of its outstanding 7.375% 2024 SSNs for new 13.25% 2026 SSNs, which will form a single series with the new offering. The exchange also includes an applicable cash consideration of £118 per £1000 nominal of notes, comprising £100 cash redemption of the remaining 10% of notes and £18 a cash-paid PID equivalent to 2% of the existing notes.
The SSNs come two weeks after NewDay pre-placed a new ABS deal. Senior notes in ABS were likely placed with the banks who structured it (JP Morgan, Lloyds, Societe Generale and Standard Chartered), 9fin’s Owen Sanderson wrote in last week’s Excess Spread. NewDay is looking at its near term debt maturity profile, it wrote, having called existing ABS structures maturing this year through VFNs.
NewDay is coming to market on the back of strong Q2 results, having reported uplifts of around 22% and 16% to its sales and EBITDA earlier this month. The cost of living crisis could be good news for NewDay, Fitch bleakly wrote, as households turn to credit cards to bridge their finances.
NewDay Instrument Pricing
HY Secondary
Tele Columbus’s €650m SSNs steadily rose this week after rumours that a long-promised €75m equity injection has finally occurred. Confirmation of the confirmation came on Friday morning, in conjunction with their Q3 earnings. Sponsors MSIP and trade player United Internet agreed to invest the extra equity in the business in their takeover offer of December 2020.
One trader told 9fin earlier this week that they had five hedge funds ready to buy the bonds with a view to a long term hold.
Others disagreed. One buysider felt the equity injection was a drop in the bucket, and the business required much larger sums of money to truly become competitive.
“There’s no value in the assets,” they said. “If it was a fibre network, that would be something, but it’s cable and needs a lot of investment.” The first banker told 9fin that many bankers are researching the business and exploring potential options for the business’ upcoming maturity wall.
On an earnings call on Friday, Tele Columbus’s management confirmed that they will evaluate all options for refinancing when the time comes, but today is a bit too early.
Spreading the love
Q3 earnings season continues, with some high profile borrowers delivering the goods.
Upfield’s €685m 5.75% 2026 SUNs jumped eight points on Thursday (17 November) and the $525m 7.875% SUNs are currently up six points, following a strong Q3 22 earnings print that beat expectations. This follows a similarly positive reaction to Q2 22 earnings on 17 August, in which the euro SUNs jumped by almost 10 points and the dollar SUNs by just under eight points. But price performance in the interim had been poor, with the Q2 22 earnings gain mostly given back by the time the company released its trading statement this week (16 November). For the full report see here.
Codere results were also positive, as it posted impressive top line growth this week, but liquidity still remains hard to come by for the Spanish gambling company as margins are squeezed. On the 16 November’s Q3 conference call, management confirmed that its 2023 base case budget includes a liquidity programme worth €45m.
The situation does not appear too dire though, as current retail cash is a “little above” the Q3-end amount of €73m as the company has become FOCF positive and no cash injection from the owners is anticipated. For the full report see here.
Less successful has been Atento, which revised down its FY 22 guidance for the second consecutive quarter, but a lock-up extension reached with major shareholders could soften the blow. The business outsourcing provider has revised its EBITDA margin down to 10.5-11.0% from 13-14% in Q1 22, while revenue is forecasted to remain flat YoY. The unwinding of cross-currency swaps will also be welcomed by bond holders, following a negative $38m FCF print for the quarter mostly due to derivatives. See the full report here.
Leveraged Loans Primary
The market continues to be starved of any new LBOs and is likely to continue to be so until at least the end of the year. Any supply that does come will likely be opportunistic refinancings or add-ons from highly-rated businesses in defensive sectors — and most likely deals below €1bn, say nine sources across buy and sell side.
So instead of larger deals, bankers have been focusing on add-ons, in an attempt to take advantage of a final window of opportunity for the loan market before the end of 2022.
Fonica, now known as Emeria, is in the market with a €300m add-on, one of few companies bold enough to issue. Foncia has been touted as potentially launching since September, according to a second buysider, who, in September, expected pricing of E+500 bps, with a 93 OID.
As of Friday, price talk is guided at E+525 bps and 94-95 OID.
But generally, public loan syndications seem to be out of vogue as bankers go private.
Last week, Caldic closed its add-on behind closed doors, while this week, a club of banks closed a €1.6bn package for Allwyn Entertainment. The company, which is acquiring the UK’s National Lottery license from Camelot, issued €441m in amortising term loans and another €441m in bullet term loans. A 2027 €300m RCF will be also be issued, alongside a £380m multipurpose facility, according to a press release. The UK license will commence from 2024.
Arranged by UniCredit as global coordinator, such club deals are typical in the CEE region, where Allwyn’s parent company Sazka is based, according to the second banker.
Leveraged Loans Secondary
It was a happy week for leveraged loan prices in secondary, though no sector rose more than a point. Industrials was the outlier, dropping slightly. The first buysider had said goodbye to all of their cyclical industrial credits in preparation for the recession ahead, which could see a general slowdown in manufacturing.
One laggard, though not an industrial, is shed-maker Keter. The plastic storage solutions and sheds business is has been struggling to get an extension of its October 2023 loan maturity agreed, and following the failure of its initial A&E attempt, loan prices dropped into the low 70s.
Last week, US hedge fund Beach Point Capital bought around €20m of the business’ €1.205bn TLB due October 2023 in the 70s, sources close told 9fin.
The company has recently scrapped its previous amend-and-extend proposal, which included a coercive element and required 80% lender acceptance. The proposal entailed buying back a portion of the TLB at par funded by new first and second lien debt and pushing out the maturity of the remainder by two years in exchange for a 100 bps margin increase. The group’s sponsor BC Partners was also offering to inject €50m of equity.
The company was downgraded by Moody’s to triple C this month due to the delay in its refinancing of the loan.
Upfield’s loans performed well this week, alongside its bonds, on the back of strong Q3 earnings, as discussed above. Indeed, the spreads business’ £710.4m TLB maturing in July 2025 was the week’s highest performer in the European leveraged loan universe. Up almost five points, it’s now indicated at 86.5-mid.
Lenders reduced their positions in Philips Domestic Appliances (PDA) ahead of this week’s earnings, expecting another disappointing set of results to follow Q2’s. The company’s €650m SSNs have jumped like a cricket on Friday following the release of the earnings.
PDA Instruments Pricing
A retailer of home appliances, PDA offers discretionary, pricey products whose sales peaked during the pandemic as consumers re-kitted their homes, some lenders say.
The unwind of this boon has left the company staggering over the past year. Foreign exchange effects (PDA pays for supplies in USD and CNY), inflationary pressures and supply chain challenges (such as semi-conductor shortages) have also battered this year’s previous results — Q2 22 EBITDA was down 64% YoY to €30m, with leverage up 1.3x to 6.3x.
Ready to extend?
Sellsiders are also gearing up for a hectic first half of next year — not with new issues, but with a wave of refinancing and extension requests, as sponsors look to get ahead of their maturities. Three buyside and and one sellside source agreed with one fund that 15-20 A&E transactions early next year could be a possibility.
One French healthcare business is getting a head start, and is said to be bringing a deal next week.
After years of suffering a bull market for debt, with sponsors pushing egregious terms and sky-high valuations, lenders are hoping to regain some ground in difficult situations. One buysider said that, should an amend and extend arise in which they are involved, they would be happy to participate, as long as they could push for proper covenants.
And while we may have to wait until the new year for a true shift towards creditors, the first signs of a rebalancing of power have already emerged.
German off-patent pharma firm Cheplapharm has returned to the market with a new waiver request, according to three lenders into the business, this time sweetened with a 50 bps consent fee.
The company’s initial attempt in October fell flat after lenders snubbed the deal’s lack of consent fee, as well as limited information around the acquisition that Cheplapharm’s existing covenants would prohibit.
The covenant barred Cheplapharm from making acquisitions at a price above 3.5x the target company’s revenues, as reported, ruling out the firm’s target portfolio of US asthma medicine patents
