LevFin Wrap — Primary shutdown sees the art of the deal fall into focus

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LevFin Wrap — Primary shutdown sees the art of the deal fall into focus

David Orbay-Graves's avatar
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13 min read

Such is the state of the debt market that, anecdotally at least, LevFin bankers – not normally prone to losing sleep over the fate of a rival firm’s deal – were enthusiastically rooting for the successful syndication of House of HR’s LBO debt package.

While that deal eventually priced, a planned €425m bond component was ultimately dropped. With market conditions at a low point, prospective issuers now appear to be exploring any options available to sidestep bringing new deals to the market.

By way of example, as Matt Levine recently pointed out, PE firms are not actually obliged to leverage up their LBOs – a handful of US shops have recently announced acquisitions with no debt financing in place (though they will no doubt look to add leverage at a more forgiving point in time).

Over the pond, and the new issuance pipeline in Europe is starting to feel very slim indeed, one banker told 9fin earlier this week. No new deals were announced in the European HY bond space this week. Looking ahead, press reports suggest Italy’s Engineering Group may look to issue a €400m bond as part of its financing backing the acquisition of Be Group.

Stada helps medicine go down with spoonful of sugar…

With the market in the doldrums, the big question is how to tackle those deals that, for whatever reason, cannot be postponed – unavoidable refinancings, or issuance from those who simply don’t see the market improving anytime soon.

As bankers and lawyers look to pull any-and-all levers available to get their clients’ deals over the line, transactions (both new issues and exchanges) spotted in recent weeks have sported various sweeteners and innovative novelties designed to ensure they get done.

First up, Stada, the German pharmaceuticals company, yesterday announced the results of its exchange offer. It offered holders of its €1,885m 3.5% September 2024 SSNs the chance to exchange into new 7.5% August 2026 SSNs. See 9fin’s editorialcreditlegal and ESG QuickTakes.

It was undoubtedly the spoonful of sugar – in the form of an eight-point cash consideration – that helped the medicine go down. The offer from the Bain Capital- and Cinven-owned company resulted in a substantial €1,385m being exchanged into new notes.

While the upfront cash was the most eye-catching element of the exchange, the deal likely also proved particularly enticing for sizeable cross-holders in Stada’s other instruments, given the credit enhancement created by pushing the company’s maturity wall back to 2026 from 2024.

The arrangers – JPMorgan and Deutsche Bank were dealer managers – are likely satisfied with the result. The new €1,385m 7.5% 2026 bond is one of the largest single-B tranches outstanding in the European high-yield market, and priced (even including the cash element) far inside the double-digit yield a new issuance would likely have needed.

9fin data shows only two larger euro-denominated single-B tranches outstanding – Masmovil Ibercom’s €1,550m 4% 2027 SSNs and Grifols’ €1,400m 3.875% 2028 SUNs.

…while Keter Group offers a more bitter pill

Not all issuers are inclined to such acts of generosity, and some recent innovations in European LevFin look set to leave investors with a sour aftertaste. Garden furniture and shed manufacturer Keter Group, owned by BC Partners, reportedly asked holders of its €1,175m E+425 bps TLB due October 2023 to exchange into debt maturing two years later.

But the most notable aspect to the deal (at least, the deal as it stood when first reported earlier this month) is the company’s threat to strip away covenant protections from any holdout creditors, presenting investors with a classic prisoner’s dilemma.

BC Partners declined to comment to 9fin on the terms of the proposal.

The English law-governed loan document states that a 66 2/3% majority of creditors can amend certain covenant terms, while a super-majority of 80% of creditors by value can strip security. The risk for holdouts is, if the deal passes, they are left behind in potentially more junior paper – not an enticing prospect, especially as Keter will likely remain a stressed credit.

This is, according to one restructuring lawyer away from the deal, perhaps the first example of such a covenant stripping exchange seen under an English law-governed loan. Years of covenant degradation is now, finally, coming home to roost, the lawyer said.

Nonetheless, the reported deal does feature some perks – a 100 bps margin pickup, a €50m equity injection and a partial buyback at par (reportedly in the realm of 25-33%) funded with new 1L and 2L debt maturing at the same time as the exchanged debt.

Whether this proves to be a big enough stick, or sufficient carrot, to get the maturity extension over the line should become clear in the coming weeks as creditor votes are tallied.

Fedrigoni’s cashless rollover facilitates participation

Other recent innovations may appear, at first blush, somewhat procedural – but nonetheless speak to the fact bankers must now pull out all the stops in order to secure every last order for the book.

For example, Italian luxury packaging and label manufacturer Fedrigoni’s issuance last week featured a “cashless exchange” element, which accounted for €152m out of the total €725m E+600 bps (OID at 91) 2027 floating rate note tranche.

This gave holders of the company’s outstanding FRNs the option to directly swap their old notes into new notes, as opposed to tendering their holding of the outstanding notes and participating in the new issuance. While similar transactions were seen in bond-to-loan rollovers, this is potentially the first time such a mechanism has been used for an FRN-to-FRN rollover.

Market participants polled by 9fin suggested this structure carries various benefits, especially for CLO investors. Firstly, for certain CLOs that are out of their reinvestment period, the cashless rollover may allow them to participate in the deal regardless – as there is no new investment as such.

Secondly, it circumvents there being a period of double-exposure for investors. Under a normal tender process, cash is spent on the new investment while the investor also waits for the redemption cash to be returned to them and the new notes are in escrow. This may require the investor’s cash position to be marked in the interim, and potentially adds pressure if liquidity is already tight.

“Some CLOs are in a tight liquidity position,” noted one buysider. “It’s hard to find secondary buyers to free up space in portfolios, even when there are deals you want to do. [Some CLO investors are] also stuck in positions that have traded down on macro-level issues, and they don’t want to sell those and crystallise the par loss when the credit itself is solid and will trade up.”

Lastly, from the issuer perspective, there may also be a slight economic incentive to the cashless rollover, as - if utilised - interest would not accrue on both the old and new notes during the interim period where both are outstanding.

If adding features such as this cashless rollover means locking in even just a handful of additional orders, shelling out a few thousand euros more on lawyers’ fees for such bespoke features makes a lot of sense – and is likely something that will crop up with increasing frequency in deals to come. “In this market, if a company can offer something to investors that makes life a little easier, it's clearly worth it,” said a second buysider.

Goldman Sachs was mandated as sole global coordinator and physical bookrunner for Fedrigoni’s new bond deal. The bank was joined by IMI-Intesa San Paolo, Morgan Stanley, Santander, Nomura, UniCredit and BPER Banca as joint bookrunners on the issuance.

HY secondary movers and shakers

At time of writing, the biggest YTM falls (price rises) in European high-yield credit on the week were:

  • AS Roma’s 5.125% EUR 2024 SSNs, which declined 5.9pps to 4.9% (early redemption, after takeover by US billionaire)
  • DIC Asset AG’s 3.5% EUR 2023 SUNs, which declined 2.5pps to 9.3%
  • Victoria PLC’s 5.25% EUR 2024 SSNs, which declined 2.0pps to 0.7%
  • Saipem’s 2.625% EUR 2025 SUNs, which declined 1.6pps to 8.6%
  • Medical Properties Trust’s 3.325% EUR 2025 SUNs 1.6pps to 8.4%

At time of writing, the biggest YTM gains (price fallers) in European high-yield credit on the week were:

  • Adler Group’s 1.5% EUR 2024 SUNS, which rose 14.3pps to 51.6%
  • Orpea’s 2.625% EUR 2025 SUNs, which rose 12.1pps to 39.8%
  • Diebold Nixdorf’s 8.5% USD 2024 SUNs, which rose 11.2pps to 78.2% (announced new money and A&E on Thurs)
  • Adler Group’s EUR 3.25% 2025 SUNs, which rose 6.4pps to 38.8%
  • Selecta’s 10% EUR 2026 2L notes, which rose 6.2pps to 20.7% (earnings due 2 Nov)
  • Intu Group’s GBP 3.875% 2028 SUNs, which grew 5.7pps to 23.9%

Leveraged Loans

Loans primary might be closed for the year, as the bread and butter of the investor base, CLOs, are squeezed for cash, with new issues facing an almost impossible arbitrage.

One of the main items landing on buysiders’ desks this week was Cheplapharm’s request for a a cheeky covenant waiver.

The German off-patent CDMO pharma platform is asking lenders to waive a covenant that prohibits it from making acquisitions at valuations above 3.5x the target company’s revenues, according to five lenders on the deal — but is offering no consent fee.

A request of majority lender consent went out last week (11 October), with the deadline for responses on 25 October.

Responses are expected to be negative, judging by the feedback from more than five lenders polled by 9fin. Buysiders mostly wonder why they should grant a covenant waiver that offers no carrot in today’s choppy market conditions.

“We’re leaning towards not consenting unless we get answers to questions we’ve asked. My biggest gripe is lack of information around the acquisition and sources of funding, liquidity for this and future M&A,” said one of the buysiders invested.

“We haven’t decided yet, but we have no reason to consent really. We will need to discuss it more internally but I’m liking the credit less as the story goes on. Will be interesting to see if they sweeten the deal,” said a second buysider.

Outside of the aforementioned Keter A&E, whose outcome is still uncertain, there are whispers around German lighting supplier SLV and its €397m TLB that is maturing next December.

Marlborough Partners, which is advising the company, had reached out to lenders for asking their views on the business and the potential for an A&E transaction, according to a source close and one buysider.

“I think [sponsor] Ardian needs to put in some money if they want this to go through,” said a third buysider invested.

The company has been lacking organic growth and underperforming, though it scored bumper performance during Covid, as more customers decided to renovate their homes. SLV’s TLB was marketed on the basis of around €70m EBITDA in 2016, but since then EBITDA has always oscillated around the €60m level, with leverage in 6x-6.5x range from 5.5x opening in 2016, said the third buysider.

Secondary prices are showing signs of stabilisation after two weeks of declines. Some industry sectors have even started to rally. Utilities led with a 0.25 point pickup, after consumer staples (+0.15), financials (+0.1), materials (+0.06) and industrials (+0.05).

euro leveraged loans, weekly price change

One of the biggest price rises came for troubled Australian oncology player Genesis Care. Both the €500m 2027 and €400m 2025 TLB rose almost six points to 37.2-mid quote in a week.

These higher quotes seem to reflect the fact that a €2m piece of GenesisCare’s €400m E+350 bps 2025 TLB traded on Thursday (20 October), and covered at 36.51, a slight pick up from a week ago when a €2m slug of the same loan traded with a 35 cover on 13 October via JPMorgan.

The recent auction for the loan was launched at short notice with bids due within an hour. GenesisCare loans have been highly illiquid, in part because of the restrictive whitelist limiting the ability of distressed funds to get involved in the name. The company was meant to have a call with lenders on Wednesday but this was cancelled, one buysider and a source close to the situation said.

Instead of facing lenders in a call, the agent bank uploaded an update on the state of the KKR’s shareholder's loan and net proceeds on the sale of its Australian cardiovascular unit CardioCo.

S&P cut the company rating to CCC from CCC+ and kept the outlook negative due to less than adequate liquidity and expectation that the company may consider a distressed debt exchange in the next 12 months.

The biggest faller this week was the British organiser of convention and trade shows Clarion Events which saw its $230m TLB down 12.3 points in a week to 65.3-mid quote.

Top European loan price declines
The largest European loan declines

Loans from the UK-headquartered global cinema chain Cineworld also suffered, after news broke that the company wants to carve out the Israeli and Eastern European part of the business, and leave only the UK and US businesses it acquired more recently in the Chapter 11 process.

This would lead to lenders having fewer assets to get out of restructuring if they end up taking over the company. The $3.325bn TLB fell 7.8 points in a week to 29.3-mid quote and €608m TLB slid 4.4 points to 33.8-mid quote.

After a tough 2021, and despite recovering margins, Wittur remains weak due to Chinese Covid-19 lockdowns affecting its operations. The Germany-headquartered elevator components manufacturer has reported an underwhelming second quarter, with a €85m Adjusted EBITDA LTM to June (down from €90m LTM to Marc) and total net leverage picking up 0.65x from previous quarter to 10.6x.

The company also posted preliminary Q3 earnings with orders down materially and weak guidance from China. Finalised numbers are expected to come at the end of November.

Even though margins were recovering with higher pricing, the company couldn’t execute orders because of the Covid restrictions, said one buysider. The company had to draw a small amount from the RCF, they added.

Wittur’s €530m TLB is currently quoted at 66.7-mid, gradually sliding down from low 70s quotes that it enjoyed in the summer. More to follow in 9fin’s report.

Secondary auctions have also active with two BWICs. Bids were due on Wednesday (19 October) at 1pm on a circa €84m-equivalent portfolio of secondary loans and bonds.

The list was comprised of 33 loans and three bonds mostly in euros with five sterling tickets — these are a £4m piece of Acacium TLB, £3.5m piece of Civica’s TLB, £1m of Shop Direct (The Very Group) SSNs and a £0.75m slug of Zenith SSNs.

On offer were also recently issued 2022-vintage loans which priced with premium OIDs, such as €3m of Inetum TLB or €2.2m of Veonet.

The full list is below:

portfolio of secondary loans and bonds

Bids were due on Tuesday (18 October) at 1pm on a circa €95m-equivalent portfolio of secondary loans.

The list was comprised of 37 loans mostly in euros with four sterling tickets — these were a £3m piece of Constellation Automotive, £2.25m of Corialis, £3.3m of Ethypharm and a £2.9m piece of Zoopla’s TLB.

The full list is below:

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