High-Yield Primary

Whether or not to place Stada’s exchange offer — launched late on Wednesday — in the primary or secondary section of this week’s wrap proved something of a head scratcher.

The German pharmaceuticals business is offering holders of its 3.5% 2024 SSNs, totalling €1.885bn across two series, the chance to exchange at par into new €500m-minimum 7.5% 2026 SSNs. Alongside the exchange notes, participating holders also receive eight points in cash.

For a business that investors are generally comfortable with to propose an A&E-type debt transaction indicates the type of creativity CFOs must now employ in today’s prohibitively expensive new issue market, one buysider told 9fin yesterday. “If the exchange goes well, this type of thing could become a model for how HY companies could approach their upcoming maturities.”

The move suggests the company does not see the cost of capital environment improving in the next couple of years, agreed a second buysider, who noted that there is a cluster of HY maturities coming up in 2024-26, and that it’s probably a smart move to get ahead of this.

On first blush, the exchange looks expensive. A rough calculation: Stada will be paying 23 points (eight points upfront cash, 15 points interest) for the next two years on the exchanged debt, compared to the seven points interest it would pay on its 3.5% 2024 SSNs if it redeemed them at maturity.

But given where a refinancing bond would likely price today, it seems unlikely the 7.5% exchange notes will trade at par. The 3.5% 2024 SSNs were trading at a YTM around 8.7% prior to the exchange launch, meaning a hypothetical new four-year SSNs issuance, after new issuance premium, might reasonably be expected to price upward of 9.5%.

If so, the eight points in cash compensates holders for the discount the exchange notes may trade at. Even if the new 7.5% SSNs trade in the low-to-mid 90s, participating bondholders still get 8-10 points upside from market prices prior to the exchange offer, the first buysider suggested. The outstanding 3.5% 2024 SSNs jumped four points to 95-mid after the exchange announcement.

Floating rate paper pushers

But proving that the European HY new issue market does indeed remain open – at least for those willing to pay up – two new bonds are also pricing this week. Fedrigoni is set to reopen the LBO market this week, after House of HR and Inetum pulled their recent notes offerings, while UK-based oil producer EnQuest priced a refinancing bond.

Italian high-end labels and packaging company Fedrigoni is expected to price its 5NC2 SSNs and 5NC1 senior secured FRNs offering today, having upsized the deal to €1,025m from an originally envisaged €875m to take out a €150m TLA component. The bond finances Bain Capital’s sale of around half its stake in the company to BC Partners.

Price talk was today updated to 11.75-12% for the €300m SSNs (including 2.5-3 points OID) and to E+600 bps (0% floor) at an 90-91 OID for the €725m FRNs.

See 9fin’s Credit, Legal and ESG QuickTakes here.

As highlighted in previous 9fin coverage, the deal has come to market at a challenging time and is on the big side — being one of the largest single-currency LBO financings this year. But buysiders told this news service that the credit is well-liked and the book has been supported by significant roll from Fedrigoni’s outstanding FRNs, which are being refinanced.

Goldman Sachs was been mandated as sole global coordinator and physical bookrunner. The lender is joined by IMI-Intesa San Paolo, Morgan Stanley, Santander, Nomura, UniCredit and BPER Banca as joint bookrunners for the issuance.

EnQuest for the Oily Grail

London- and Stockholm-listed energy company EnQuest priced $305m of 11.625% 2027 SUNs at 98.611 for a yield of 12% on Wednesday.

The new notes – alongside a $400m drawdown of its $500m (plus $300m accordion) reserve-based loan (RBL) and around $100m in cash – are earmarked to repay the company’s $792.3m 2023 senior PIK toggle notes. Pro forma of the refinancing, the company’s secured net leverage stands at 0.2x and its net leverage at 0.8x.

See 9fin’s EnQuest Credit, Legal and ESG QuickTakes.

Despite the company’s conservative leverage and supportive oil prices (Brent quoted at USD 94.7/bbl at time of writing), the first buysider said they passed on EnQuest largely for technical reasons. As a European company issuing in US dollars, the credit “falls through the cracks”, the investor said, who noted that bonds of this ilk – unlike their US energy counterparts – often fail to trade in line with fundamentals.

In this regard, the buysider drew a parallel with another UK-listed E&P company, Harbour Energy (formed from the merger of Premier Oil and Chrysaor), which also has USD bonds outstanding. Harbour’s $500m 5.5% 2026 SUNs have traded at a YTM above 8% for much of H2 22 so far, according to 9fin data, despite net leverage of just 0.3x.

The second buysider, who did participate in the EnQuest deal, agreed that this dynamic weighs on EnQuest. Inevitably, Europe has a smaller USD buyer base than the US, but additionally ESG is a greater concern in energy investments in Europe, while US accounts have a plethora of domestic investment opportunities without considering unfamiliar European names.

For the second buysider, rather than being a drawback, this equation adds up to an attractive proposition – meaning relatively better-quality energy names in Europe offer higher yields than their US counterparts.

Global coordinators and joint active bookrunners on EnQuest’s deal were BNP Paribas, BofA Securities, DNB Markets and Goldman Sachs (B&D). Deutsche Bank joined as bookrunner.

High-Yield Secondary

Kwasi Kwarteng was today fired by Liz Truss, to be replaced by Jeremy Hunt. The UK prime minister has also rolled back on her mini-budget plan to cut corporation tax.

UK gilt yields fell today, with expectations mounting last night on a government U-turn. At the time of writing, the two-year gilt stood at 3.84%, the five-year at 4.19% and the 10-year at 4.19%. Earlier in the week, Bank of England Governor Andrew Bailey reiterated that the central bank would wrap up its emergency gilt purchase scheme this week.

HY investor eyes are now focused on upcoming ECB meetings – the next monetary policy committee is set for 27 October – as well as the upcoming round of 3Q earnings releases, according to the first buysider.

In terms of market movers this week, the key outperformer has been United Group, an eastern and southern European focused telecoms and media operator, whose 9% 2025 senior PIK toggle notes fell nearly 10 points last week.

The notes recouped around 7.3 points on the week to be indicated at 70.2-mid today for a STW of 21.2%. The company announced on Wednesday that it plans to carve out some of its tower assets and use the cash to deleverage.

The move can be compared to Stada’s exchange, suggested the first buysider, noting that, in general, leveraged companies are having to get creative about how to tackle their upcoming debt loads. The PIK notes sold off in particular because they are the most junior and esoteric part of the capital structure, rather than any particular concern over the instrument in particular compared to the rest of the capital structure, the investor added.

Read 9fin’s legal review on the tower carve out here.

Leveraged Loans Primary

A whisper of activity in primary this week. Recruitment firm House of HR priced its €310m 2030 second lien at E+900 bps and 92.75 on Wednesday, after closing its €1.02bn 2029 TLB the week prior at E+575 bps and 92.

Across both tranches, the deal ultimately included traditional CLO demand, private credit and commercial bank demand, according to sources close to the deal, with regional banks also assisting. Overall, more than 60% of the TLB book was placed, with a smaller portion of the 2L also kept for further sale. The balance held by banks is under MFN provisions at 92 — if sold at under 92, lenders allocated will get a make-whole margin for the next 12 months. The bonds are still expected to re-launch in the future, one of the sources close said.

With that deal (mostly) wrapped up the market is, then, looking down the barrel of another drought in primary issuance. This is not unexpected, however, for either buyside or sellside sources, who say they’d been anticipating “pockets of inactivity” throughout the latter half of the year. Whether this is a pocket or an entire crater is yet to be determined.

So what could be on the horizon? Barclays argued this week that 2022 M&A levels are surprisingly robust, partly driven by 2021 overhang deals given it was an outlier blockbuster year. Still, more than $300bn of announced M&A is pending in Western Europe (beyond just HY and leveraged loans), the bank wrote, which should keep intra-regional activity flowing in H1 2023. Other banking sources say they are still being approached for deals such as refinancing drawn RCFs and private bolt-on M&A funding.

“We are still open for business, but the risk is printing,” one sellside source told 9fin this week. “We have a number of potential mandates through to the end of the year. The question is whether, when the market improves, the company can stomach the new cost of capital.”

Still, issuance is likely to skew towards bonds, the banker said, having more confidence that HY can price in risk quicker than the loan market can. “The loan market is strapped for cash,” the banker went on, as 9fin’s Owen Sanderson expounds upon in this week’s Excess Spread. “A lot of CLOs that are in some form ramped are not able to price vehicles because the arbitrage does not make any sense at the moment.” With UK pension funds also selling out of more CLO exposure, “it’s all heading in the wrong direction” on the CLO front, they said.

Leveraged Loans Secondary

Leveraged loans were again down overall this week, with buysiders continuing to see greater opportunities in discounted secondary than any trickles that might come their way in primary.

In individual moves, CSM Ingredients tops the list on a -11 points since last week. The company reported poor results last month, with one trading source telling 9fin they were receiving high interest in trading out of the name. Its stands at 79.5-mid as of Thursday 13 October:

CSM Ingredients is the latest in a long line of Foods companies to struggle with rising material costs following Russia’s invasion of Ukraine and the resultant strangle on wheat and oil supply.

Organic foods company Ecotone, for example, has consistently missed its earnings budgets this year, according to two lenders to the business. For July 2022, the company reported gross profit of €16.9m, below its budgeted €18.4m. However, a slight recovery in some metrics in July has been welcomed by lenders — EBITDA in July, for instance, exceeded its budget of €4.9m to come in at €5.4m. YTD EBITDA was €37.6m. See the full report here.

Elsewhere in Food, the prevailing negative sentiment is softening for companies such as Labeyrie. “I’ve become constructive on this name,” one lender said this week, as the cost of some of the company’s key raw materials (such as salmon) come down while the company still maintains its own higher prices. Labeyrie could struggle with having the cash to build up inventory ahead of its busy Christmas period, the lender said, but has an RCF available with relationship banks that are likely to be generous with waiver requests.

“Now it’s in the 70s, I think it’s in a position where the risk-reward works well,” the lender said. “There’s a good par build up opportunity here; the worst is behind us.”

The story of the week, however, is resin-based goods manufacturer Keter, which is currently negotiating with its lenders for an A&E on over €1bn of TLB debt maturing in October 2023.

The company, owned by BC Partners, reported EBITDA of €17.3m for July 2022 — €5.4m behind July 2021 and -€11.2m off budget. €166.7m of YTD EBITDA was similarly -€23.9m and -€37.3m behind the same period last year and 2022’s estimates respectively.

Senior net leverage, meanwhile, ticked up from 4.7x in May 2022 to 5.0x in July this year, now at 0.5x above July 2022’s budget of 4.5x. Reported senior net leverage stood at 4.2x in July 2021. Management put this increase in leverage over the summer partly down to lower profitability.

Keter ended the month with a €220m liquidity position with €65m cash of balance sheet and its RCF fully undrawn, as well as €54m of unused ABF and NRF. See the full earnings report here.

Keter’s instruments are currently trading between 85.5 and 86.3 as of Thursday 13 October, having dropped on news of the A&E.