LevFin Wrap — Primary issuance window opens ajar

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LevFin Wrap — Primary issuance window opens ajar

David Orbay-Graves's avatar
Laura Thompson's avatar
  1. David Orbay-Graves
  2. +Laura Thompson
10 min read

With the Christmas break hovering into view, market participants’ thoughts are already turning toward what 2023 may hold in store. In terms of new issuance volumes, the view appears to be: better, but still not great.

Supply has “fallen off a cliff” this year, with just €18bn in issuance anticipated in 2022 compared to €97bn last year, analysts at ING Bank said this week.

“With [European] HY bond maturities ratcheting up, including an estimated €19-20bn in 2023 and €36-37bn in 2024, we expect primary volumes to go up next year,” according to the research report, published this week.

“We have put a marker at €30bn, a rather low level relative to the recent averages and assume that there is some upside to this level. Clearly, this would also imply a low net issuance of €10bn or so.”

Nonetheless, as noted in this column last week, the recent rally in European high-yield markets pushed ajar an issuance window. The iTraxx Crossover has tightened further this week to 536bps at time of writing, from 554bps last Friday. As reported, levfin deals on the horizon include DSM Engineering, Ekaterra, and Engineering Group.

But aside from a €75m tap (€19m of which was privately placed with Goldman Sachs to cover a short position) of Fedrigoni’s recently issued bonds, no European issuers have taken advantage of this opportunity to bring new deals yet.

Whether this week’s rate hiking action prematurely shuts that window remains to be seen. Both the Fed and the Bank of England announced 75bps hikes, while Christine Lagarde said the ECB would push on with rate rises regardless of a rising risk of recession.

For those companies that need to issue refinancing deals, it may make sense to approach the market sooner, rather than later, to avoid a crowding-out affect when maturities start to ramp up in 2024 and 2025, agreed two leveraged finance bankers.

The fact that recently minted bonds have generally performed well in secondary trading may offer further encouragement to hit the market. For example, Swedish alarm maker Verisure’s 9.25% 2027 SSNs, priced at par in September, are indicated at 104.1-mid.

Italian papermaker Fedrigoni’s 11% 2027 SSNs and E+600 bps 2027 SSFRNs, priced at 97.25 and 91 respectively, are up to 101.9-mid and 95.9-mid. Meanwhile, Spanish gaming company Cirsa’s 10.375% 2027 SSNs, priced last week at 98.11, are indicated at 100.7-mid.

Cirsa’s bond was increased to €425m from the originally announced €350m. Asked if the issuance was evidence of a reopening in primary markets, one of the bookrunners on the deal told 9fin that – while a positive indicator – there were also credit specific factors at play.

The company is set to use the issuance to repay its €563m 6.25% 2023 SSNs, the refinancing of which will enhance the issuer’s credit quality, said the banker.

For holders of Cirsa’s other bonds – already comfortable with the credit – it therefore made a lot of sense to participate in the new issuance, which both improves Cirsa’s maturity profile and also offers a significant yield pick-up (Cirsa’s other 2027 SSNs were priced at par in 2021 with a 4.5% coupon).

North Sea-focused E&P company EnQuest is proving an exception to the trend of new issuances trading up. Its 11.625% 2027, priced at 98.61 last month, is down to 97.7-mid. As reported, the issuance concluded EnQuest’s refinancing transaction, and the company will repay its 2023 maturity with cash.

Movers and shakers

Excluding distressed credit (cash price > 40 cents, YTM < 100%), the following European bonds saw some of the biggest week-on-week moves in spread to worst (STW) terms, according to the 9fin’s European price moves screener.

Price decliners

  • Talk Talk £685m 3.875% 2025 senior notes STW rose 2.8 pps to 11.4%, cash price fell 4.33 pts to 79.8-mid
  • Hurtigruten €50m 11% 2025 senior notes STW rose 2.19 pps to 12.3%, cash price fell 4.37 pts to 93.6-mid
  • Demire €600m 1.875% 2024 senior notes STW rose 1.93 pps to 24.8%, cash price fell 2.08 pts to 63.9-mid
  • Matalan £130m 9.5% 2024 second lien notes STW rose 1.71 pps to 26.9%, cash price fell 1 pt to 80.5-mid (TopCo downgraded to CCC by S&P)
  • Goodyear $800m 9.5% 2025 senior notes STW rose 1.64 pps to 2.3%, cash price fell 1.1 pts to 103.6-mid (Q3 22 results announced)

Price risers

  • Adler Real Estate €300m 2.125% 2024 senior notes STW declined 5.63 pps to 22.7%, cash price rose 4.7 pts to 76.7-mid
  • Lycra €250m 5.375% 2023 senior secured notes STW declined 5.41 pps to 56.0%, cash price rose 2.2 pts to 80.3-mid
  • Atalian €625m 4% 2024 senior notes STW declined 3.24 pps to 2.4%, cash price rose 4.3 pts to 99.1-mid
  • DIC Asset AG €150m 3.5% 2023 senior notes STW declined 2.43 pps to 4.1%, cash price rose 1.94 pts to 97.6-mid (Forecasts adjusted this week)
  • Adler Real Estate €300m 3% 2026 senior notes STW declined 2.19 pps to 13.2%, cash price rose 4.25 pts to 67.94-mid

Leveraged Loans Primary

Some smatterings of activity this week as Ineos and Nomad Foods came to market — though most of the action was in dollars. Opinions on both the buy and sellside are, however, split on how positively to receive these developments, with the Christmas period looming and the ghosts of deals pulled on issuers’ minds.

“I’m expecting a few more deals to come through ahead of December and the usual festive shutdown,” said one sellside source. “But there’s an understanding among many Single B issuers that this still likely isn’t the right moment for them.”

“It has to be stronger BB names at the moment and, besides, it’s clear that if issuers can go in dollars, there’s strong appetite for them to do so,” said a buysider.

2023 does bring some rosier expectations. Although 2022 European leveraged loan supply so far has been at the lowest level since 2012, as Barclays wrote in a research piece this week, 2023 could be 80% above 2022’s levels.

In total, Barclays forecasts €65bn of gross supply to the European leveraged loan market in 2023, excluding repricings, for net supply of €40bn. This does, however, remain a 15% step down from the 2017-2020 average.

Barclays also speculated that refinancings could dominate the 2023 landscape, forecasting a jump from the historic average of 24% to 28% of overall supply. As reported by 9fin, the near-term maturity wall is largely viewed as manageable (€24bn of leveraged loans in 2023 and 2024, per Barclays), but this leaps to €106bn in 2025 and 2026 — 40% of the market notional — and will drive much of next year’s supply.

In the middle of a chain reaction

For some on the buyside, this week’s Ineos deal proves the market remained open for selected credits. Well-known, BB-rated and with an attractive yield, Ineos in fact increased the size of its deal, doubling an initial €400m and slotting another $200m onto its original $1bn USD tranche, as it attempts to take down its €3bn 2024 loan maturity wall piece by piece.

“It feels like a positive moment for the market,” said a second buysider. “Issuers have been so spooked and for this to go the way it has gone, it gives some hope, although likely more for the beginning of next year than the rest of this one.”

The deal was not, however, as “straight-forward” as some on the buysider had hoped. The risk of a downgrade looms for the credit, some said, with the company coming off peak EBITDA into its down cycle after a blockbuster 2021. Buysiders also had concerns about Ineos’s reliance on non-recourse project finance debt for its Project One cracker in Antwerp, and flagged the group’s extensive capex plans with minimal EBITDA benefit in the short term.

“Even this credit knows it can’t come with its entire refinancing need with markets the way they are,” said a third buysider. “I expect they’ll go high yield next year and they’ll get it done in bits. They’ll pay for it, definitely, but they’ll get it done.”

Ultimately, Ineos priced its €800m 2027 TLB at E+400 bps and 96.5, with a $1.2bn 2027 TLB at S+CSA+375 bps and 96.5 alongside. Read a full preview here.

Bird’s Eye view

UK-based Nomad Foods also turned to the US markets this week. Lenders on the call repeatedly questioned why the company had shunned sterling or euros, according to one participant.

“The US market just provides more certainty of outcome recently for the BB space,” they said. “If you look at Flutter and Entain, yeah they were wide, but they got done. I don’t know that anyone would say the same on this side.”

On this deal, buysider concerns came around Nomad’s reliance on Russian whitefish. The company is trying to reduce its exposure (despite not encountering significant problems from sanctions), turning instead towards countries in South East Asia such as Vietnam. One existing lender described themselves as “broadly okay” with these efforts — “They’ve got such good pricing power that they can eat through any costs that come their way through increases.”

Others were less enthused. “You’re in the penalty box if you do that [source fish from Russian territory],” said a fifth buysider. “It’s not a fun topic. So you have to juice up the spread.”

The company tightened price talk on the deal from S+425 bps to S+375 on Friday, with OID at 96. Commitments on the $825m 2029 TLB are due on Friday. Read a full preview here.

Leveraged Loans Secondary

Secondary markets traded up this week across all sectors tracked by 9fin, with only three (Energy, Utilities, Consumer Stables) below +1 point growth. The week’s top climbers include UK nursery operator Busy Bees (which is rumoured to be up for sale, per Bloomberg) and French property management firm Foncia, both of which rose +5.4 points.

Those that fell the furthest, meanwhile, include long-embattled GTT Communications (-3.9 points) and UK ticket exchange Viagogo (-3.5 points).

French premium foods firm Labeyrie was also down -2.75 points this week. Opinions remain divided on the credit as its earnings continue to deteriorate, with the company most recently reporting a nearly 150% YoY drop in monthly EBITDA to just €3.8m for August 2022. Some lenders argue that, with the loan now indicated at 69, the risk-reward has clicked into its proper place. See the full August results here.

Elsewhere, shareholders in troubled cancer treatment chain GenesisCare waived early repayments of their bridging loans from the group’s sale of Australian cardiology business CardioCo, according to a lender and a source close to the creditors. Maturities on the facilities were also extended from July 2023 to November 2023, with a further six month extension possible at the discretion of KKR and China Resources Group (CRG).

The reprieve will be crucial for the business, where leverage is up to an eye-watering 26.25x as of June 2022, while September 2022 SFA LTM EBITDA is as low as $35.6m, according to lenders into the business. Sources close to the company and creditors said the company has yet to initiate discussions with the lenders over its liquidity issues. Read more here.

And finally, Moody’s downgraded Keter to Caa2 in the face of its upcoming €1.205bn TLB maturing in October and its struggles to negotiate a refinancing plan with lenders (read here). Keter’s EBITDA fell 15% in August 2022 despite a 13% sales bump, Moody’s wrote, with the agency anticipating leverage of around 8x for 2022.

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