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LevFin Wrap – Safe, Reliable… Swedish

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  1. Huw Simpson
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9 min read

High Yield Primary

Conditions remain challenging, but a market rally in the second half of the week saw equity indices post low single-percentage gains, and across credit the iTraxx Crossover closed in 24 bps on Thursday to 439 bps – its largest single-day fall in almost two months.

With no immediate signs of a primary market ripe for re-opening, issuance year-to-date now totals just ~€19.8bn, and this week’s sole offering came from Geely-owned Swedish automotive group Volvo Cars, following in the path of Elis’ success.

The new €500m RegS Green notes were issued under a €3bn EMTN programme (Ba1/BB+) – with equivalent proceeds to the offering used to invest in the development and production of battery-electric vehicles. Just 3.7% of vehicles sold in 2021 were battery-electric, which the group hopes will increase to 50% by mid-decade, before going fully electric by 2030.

IPTs of a 4.750-4.875% coupon reduced to 4.375-4.500% on guidance, before pricing at the tight end to yield 4.375% (4.250% coupon, OID 99.353). On the cusp of IG, Volvo can pull demand from both traditional and HY-tourist accounts – its books were well covered at the tight end (€1.2bn+), but failed to draw the huge 10x-plus oversubscription of Elis €300m 4.125% SUNs (Ba2/BB+) last week.

The €500m SUNs have traded up around a point since issuance, last seen today at 100.5-mid. Similarly, Elis’ €300m SUNs – issued at 99.45 – were last seen at 100.6-mid.

Green Shoots: Volvo Cars issued debut Green Notes in Oct-2020

Unlike Volvo Cars, the Elis deal was ticketed to repay existing debt. The incentive for opportunistic refi transactions has of course decreased as spreads rise. Almost half of Euro-issuing HY names refinanced debt in 2021, pushing out maturities while spreads tunnelled to post-Covid lows (ICE BofA Euro High Yield Spreads averaged 3.15% in 2021) – this left relatively few names with an urgent need to roll over debt.

Screener: Euro-only bonds, where use-of-proceeds includes refinancing (LHS), and proportion of EHY refinancing in a given year (RHS)

Excluding bonds trading below 80, there’re 51 companies with outstanding Euro debt due in the next eighteen months, which totals just under €27bn (ignoring any partial redemptions). Of this, only seventeen companies (or €7.6bn principal outstanding) have single-B or triple hook ratings at the corporate level.

The issue of floating rate debt – with its partial interest rate hedge – has in comparison continued with (relative) strength. We first covered this back in November, suggesting that rising rates would encourage further FRN issuance in HY, and we’ve now seen ten new tranches in 2022, as well as the overweighting of floating portions in combined SSN-SS FRN packages.

Note: Includes EUR-only Senior Secured Notes and Senior Secured Floating-rate Notes. Inflation is a 3-month moving average

High Yield Secondary

Some positive sentiment crept into markets, as instruments tracked by 9fin recorded a +0.67 pt gain on the week (69% +1.23 pts | 29% -0.61 pts), the first since early April, although bonds are still on average down around -9 pts this year. Across industries, Healthcare (+1.77 pts) and Communication Services (+1.23 pts) performed best, while Energy (+0.19 pts), Consumer Staples (+0.16 pts) and in particular Real Estate (-0.50 pts) lagged. And while the iTraxx Crossover tightened ~40 bps this week, outflows continued across all HY funds, according to BofA Global Research – Global (-$398m), US (-$474m) and Europe (-$499m).

One of the largest single-name losses, UK car manufacturer McLaren’s SSNs tanked -6.3 pts in the wake of rough Q1 and FY 21 numbers posted on Wednesday. The much-delayed Artura hypercar is set to launch in June, on which the group is pinning recovery hopes. And while cash burn of £59m in the first quarter exceeds the £58m total liquidity available as at March 2022, CFO Kate Ferry hopes the worst is now behind the group:

“We’re, dare I say it, at our low point,” said [CFO] Ferry. “We’re certainly at an inflection point where we’ve invested in our cars, we’ve had semiconductor [supply issues]. You can really see that in our cashflow. So we’re as confident as we can possibly be that the liquidity position is now stabilised.”

It was a different story for automotive components manufacturer Adler Pelzer however, who posted Q1 2022 figures on Wednesday showing a (mostly acquisition-led) +40.1% YoY increase in Sales, and +10.8% increase in EBITDA. Up +5.5 pts on the week, the €350m SSNs are still yielding 14%-plus, although maturities are still around two years away. “thank God we went for seven years instead of five” noted CFO Wayne Robinson when discussing the 2017 bond.

Adler Pelzer makes gains after the release of FY numbers, delayed due to auditor's PPA calculations and the integration of acquired entities, and resilient Q1 earnings

Following last weeks retail slideAsda reported Q1 results on Thursday, showing a -9.2% and -32% YoY decline in Sales and EBITDA respectively. Inflation and energy prices have eaten into family incomes, whose spending power fell £40 to £205 a week in April – the lowest level since October 2018. The £500m SUNs fell around half a point, currently seen in the mid-70s, while the SSNs are in the mid-80s. Elsewhere, owners TDR and the Issa Brothers are reportedly ready to walk away from takeover talks with Boots, after disagreements on price – earlier this week we considered the implications of a Boots bid under Asda’s bond covenants.

Morrisons meanwhile suffered a set-back as Ares walked away from an initial private placement of up to £500m of the supermarket’s £1.075bn SSNs, before participating in a recut deal with more than ten investorsAs reported, numbers go stale on 16 June, and despite hopes to launch this week, the deal is now likely post-Jubilee holiday. According to investors, banks are talking an eight-handle on the remaining SSNs.

And lastly, Patrick Drahi has increased his stake in UK telecoms group BT. Via Altice UK, the shareholding has grown from 12.1% to 18% – prompting UK business secretary Kwasi Kwarteng to exercise his ‘call-in power’. The new powers, granted under the National Security and Investment Act 2021, allow the government to intervene on national security grounds.

Leveraged Loans Primary

Last week OptiGroup became yet another shelved deal of 2022 and banks are once again shying away from broad syndication. Even against rising recession fears, loan participants still believe there is demand in the market for the right type of credit. Expectations are that no primary will come at least until after the Jubilee holiday.

“Pipeline remains strong, but arrangers are wary of launching given what happened with OptiGroup. June could be more active, but it remains to be seen as to what spreads they come in on. We are hearing they need to come back to lining up deals in primary, since banks can’t really underwrite other deals, until they relieve their balance sheets,” said one buysider.

Until then, UK-based private school operator Inspired Education is the only deal in the primary. The €250m incremental term loan B will fund the acquisition of a group of schools in Brazil and the non-fungible add-on is being offered at 475 bps over Euribor at a 96.5-97 OID.

Initial price talk offers a pick up from the existing €715m TLB which pays at 325 bps over Euribor. Two buysiders polled by 9fin agree that Inspired Education is a stronger credit and should be able to gather traction to avoid OptiGroup’s fate.

“You can still raise money from the market, you just need to bring the right deal. [The] CLO bid is there [you] just need to come at the right price,” said a CLO PM.

CLO liabilities have widened recently alongside a declining secondary loan market. Volatility has also spooked anchor triple-A buyers, which could make some CLO houses temporarily slow down ramping up while being hit by redemptions at the same time. “On CLO side, [there are] no triple-A buyers, our clients want to swap into bonds, but [this is] still hard to execute, since we have six months to settle loans as well,” said a second buysider.

“It is true that big buyers stepped back. It is a small number of accounts, but big numbers, [it] does not mean they will step back forever, they will be back, and the arbitrage still looks attractive,” added the CLO PM.

Leveraged Loans Secondary

Buysiders are still complaining to 9fin about their struggle to get any sales done in secondary. Loan prices were on the slide once again this week, with price drops across most sectors on rising fears of recession and unstable credit fundamentals. Consumer staples dipped far deeper than the rest, being the only industry sector to fall more than a point.

Industry loan moves: prices from 19th-26th May

Asda was the biggest loan decliner of the week seeing its €845m TLB slide 7.9 points to 90.3-mid, followed by Biscuit International and Upfield (Flora Group), whose loans dropped seven and six points, respectively, to the around 85-mid area.

Individual loan declines: prices from 19th-26th May

The current market environment is bleak for Asda, one of the main pricing indicators for the long-awaited Morrisons LBO. This week the UK supermarket chain reported first quarter earnings with revenues and adjusted EBITDA declines. Unfavourable working capital dynamics also fed into negative free cash flow and increased net leverage by half a turn to 3.9x. Changes in consumer spending habits are expected to lead to a material deterioration in sales, whilst inflationary pressures are expected to impact Asda’s cost base throughout 2022. Our full earnings story is available to clients here.

French manufacturer of private label bakery goods, Biscuit International, also reported less digestible earnings, and as a result has seen both €495m and €205m TLBs fall seven points in a week to 85-mid quote. With €118m of Adjusted LTM EBITDA to March 2022, senior secured net leverage is 6x through first lien and 7.4x total – including €49m of cash.

On pro forma basis quarterly EBITDA was only €9m for Q1 22, down from €25m in Q1 21, even though volumes grew 3% on YoY basis (but down 2.9% compared to Q4 21). Revenues were up about 6.7% versus Q1 21 on a pro forma basis but the contribution margin decreased to 19.3% from 28.8% in Q1 21. More to follow in a full earnings update.

“[The] Results were underwhelming as they are squeezed by raw materials prices and [are] waiting for price increases to pass through,” said one buysider. “It did trade down on the results. But how much is traders marking it down, and how much is being sold, is hard to tell. There is not much volume in the name, no one really wants to sell, so there’s not much liquidity,” they added.

Upfield (Flora Group) loans were also hit this week, most notably their £710m TLB which slid six-points to the 84.5-mid level amid tepid reaction to its first quarter earnings.

The company muscled through another “unprecedented” quarter as it took a 6.9% volume hit – a dip that management admitted had been forecast to be “much higher” – saying that it is successfully pushing through price increases. Upfield is slated to see worse pain in Q2 2022, say lenders, before easing off in Q3 and Q4 as raw material costs normalise, allowing for EBITDA breathing room and subsequent deleveraging.

“The results didn’t blow me away but they didn’t necessarily worry me either,” one lender told 9fin. “I’m still thinking of this one as a stable food product going into, potentially, a recession. The pain points were exactly what I expected them to be, so the question left is around how they de-lever from here.” More details on the earnings update were published earlier today on 9fin.

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