After an active December, marked by a high number of relatively small refinancing deals, LevFin markets have – at last – wound down for Christmas, with no new syndicated deals priced this week.

One of the few acquisition deals left in the pipeline, CVC-backed Stark’s €850m acquisition of UK building materials company Jewson, has reportedly been financed with a €375m three-year bank loan, dodging a public syndication process. Jewson is a pure-play UK business, exposed to industry cyclicality. As such, a strategic buyer was always seen as the preferred option. Banks are expected to hold on to their exposure.

Meanwhile, as 9fin’s Kat Hidalgo reported earlier this week, we have visibility of at least some new supply for early 2023, as PAI Partners agreed to acquire International Flavors & Fragrances’ (IFF) Savory Solutions division for $900m, expected to be backed by around €300m debt in TLB format.

The Year In Review

Here at 9fin Towers, we’ve taken the opportunity of the winter lull to look back at the year that’s gone and to cast our eyes ahead to what the new year may bring, with a bumper crop of reviews to fill your holiday reading lists…

• 9Charts about European leveraged loans in 2022
• Pivot Tabled, Managing Liabilities — 2023 Distressed/Restructuring preview (if you are not a client you can request a copy of this report here)
• White Swans and Auditor Black Marks — 2022 Distressed/Restructuring review
• CLO Outlook 2023 — Things can only get better?
• US LevFin Wrap — So long 2022, it’s been emotional
• Xmas Spread — The 9fin Securitisation Awards
• TGIF Workout — Temporal Thoughts; Sub Standard; Addled Adler

To borrow a phrase from the late Queen Elizabeth II, 2022 truly proved an annus horribilis if ever there was one. Readers looking for some pre-Christmas levity can safely skip ahead to the next section…

Just as soon as we thought the world was back to some semblance of normality after two years of pandemic lockdowns, a series of (interrelated) global events upended any hope of a return to business as usual.

Russia launched a full-fledged invasion of Ukraine. Energy prices skyrocketed. Inflation accelerated to highs not seen since the 1980s. Central banks started a rate-hiking cycle. US-China relations deteriorated further. In the UK, political chaos reigned.

As if that wasn’t enough, the effects of climate change manifested more visibly than ever before. The heatwave that scorched London’s usually verdant parks was just the tip of the (melting) iceberg, as wildfires swept Europe and floods ravaged Pakistan.

Most worryingly, 2022 perhaps also marks the end of the 30-year consensus that mankind has transcended the behaviours that wrought such havoc through the 20th Century – a period dubbed The Age of Extremes by historian Eric Hobsbawn – and now lives in a perpetual state of globalised enlightenment and mutual cooperation.

(Hobsbawm himself never laboured under any such illusion: “The world of the third millennium will therefore almost certainly continue to be one of violent politics and violent political changes. The only thing uncertain about them is where they will lead.”)

A decade of easy money is now over. Recession is widely expected across Europe, the UK and the US.

How has the European high-yield market reacted to these events? The shifting sentiment is easily illustrated by moves in the iTraxx Crossover index – today it stands at 479 bps, versus 240 bps at the start of the year (peaking at 672 bps on 27 September, immediately following then-UK Prime Minister Liz Truss’ disastrous mini-budget).

We’ve observed a number of trends that stem from this broader environment:

Issuance volume declined dramatically (from a bumper 2021): As Laura Thompson and Josh Latham wrote yesterday, euro-denominated leveraged loan issuance, at €39.5bn, is down 70% YoY. Primary bond markets fared even worse, with euro-denominated high-yield issuance falling 79% YoY to €26.8bn across 80 instruments this year, from €127.0bn across 278 instruments in 2021, according to 9fin data.

Issuers need to deal with maturities further in advance: Debt issuers, used to tackling upcoming maturities 12 months in advance, need to look further ahead. As Chris Haffenden wrote in his outlook for the 2023 restructuring market, auditors are pushing companies to extend the look-ahead period to 18-24 months. And it’s not just the auditors, with ratings agencies increasingly taking a firmer view too, as discussed last week.

Timing the market has never been more important: Gone are the days of guaranteed price tightening from IPTs. In the current environment, getting deals over the line requires borrowers to opportunistically time issuance. After effectively shutting down earlier in the year, primary markets reopened slightly in October 2022 – with Italian paper and packaging manufacturer Fedrigoni and Spanish gaming operator Cirsa among the reopening trades. However, as noted above, activity really picked up in December, as issuers sought to refinance and put liquidity on the balance sheet while they still can. “Make hay while the sun shines,” as one banker put it.

The rise of the A&E transaction: With primary markets closed for many, amend and extend transactions have become more prominent (and are expected to remain so next year). These have come in a variety of flavours. German pharmaceuticals business Stada took a decidedly market friendly approach (offering an eight-point upfront cash fee), meanwhile Israeli garden furniture maker Keter was more stick than carrot, as it sought to extend maturities by threatening existing holders that their covenant protections would be stripped away if they didn’t participate.

Innovation can help get deals done at times of market stress: As market conditions deteriorated, innovation has appeared. As 9fin highlighted back in October, one provision that started appearing was the Syndication MFN clause, which puts a floor under the OID that underwriting banks can offer debt at after the initial syndication process is completed. Other innovations include the cashless rollover option that appeared Fedrigoni’s bond issuance, givig holders of the company’s outstanding FRNs the option to directly swap their old notes into new notes, rather than tendering their holding of the outstanding notes and participating in the new issuance (potentially facilitating participation by CLOs that are out of their reinvestment period).

Viral 2022: Through The Credit Lens

Despite the pessimistic tone struck in some of the above, 2022 wasn’t all doom and gloom (and even financial journalists need a little Christmas cheer).

The biggest swings in the iTraxx Crossover index in 2022 were largely linked to central bank announcements and macro data releases – for example 10 June saw a whopping 31 bps intraday widening, after the ECB indicated it would hike rates for first time in a decade and concern mounted over the US CPI print for the previous month.

But as the year comes to a close, it’s also a good time to take a run through some of the viral moments of last 12 months, and to answer the question we’ve all been asking – how did the European high-yield credit market react?

All price moves are with reference to the iTraxx Crossover index.

Sunday 27 March – Will Smith slaps Chris Rock at the Oscars: A relatively muted market response to the slap that shook the world – the index tightened slightly to 361 bps on the Monday following the Oscars ceremony, from 368.5 bps the Friday before. Was Smith’s attack on Rock pre-scripted? We may never know. But the public opprobrium Smith faced was a clear sign that common decency still matters, and markets reacted accordingly.

Thursday 12 May – Kendall Jenner fails to slice a cucumber: Perhaps one of the more tangential events to impact on European high-yield credit. Nonetheless, footage of Keeping Up With The Kardashians’ star Kendall Jenner struggling to chop up a cucumber coincided with a not-insignificant tightening of the index. The event may have reinforced the European sense of superiority over American popular culture, prompting the index to tighten to 446 bps on Friday from 460 bps the day before.

Tuesday 15 November – Global population hits eight billion people: A day of celebration, particularly for those whose preferred growth metric is GDP rather than GDP/capita. On the day the world population was forecast to hit eight billion people, the index tightened 10bps on the day to 465 bps. Some (unironically) good news: the UN said this is the result of “the gradual increase in human lifespan owing to improvements in public health, nutrition, personal hygiene and medicine” but also that global population growth is now slowing – nine billion won’t be hit until 2037.

Saturday 26 November – Matt Hancock MP makes final of I’m A Celebrity: Unsurprisingly, European credit markets reacted poorly to news that the UK’s former health secretary, Matt Hancock MP, made it to the final of reality TV contest I’m A Celebrity… Get Me Out Of Here! The index widened around 9 bps over the weekend to stand at 463.5 bps on Monday. Presumably, this was taken as a leading indicator as to the competence of the British electorate…

Sunday 18 December – Argentina wins the FIFA World Cup: It may have been Lionel Messi’s crowning moment, but European credit markets were none too impressed by Argentina’s world cup victory – the index widened some 5 bps over the weekend to stand at 510 bps the following Monday. For investors, France’s defeat was likely taken as a sign continental Europe has lost its edge to Emerging Markets.

And with that, the 9fin team wishes you a Merry Christmas and a Happy New Year.