Last week, this column suggested that KronosNet’s E+575 bps 2029 TLB add-on deal, being issued to partly repay a €400m TLA that helped take the original levfin package over the line, underlined the “temporary and contingent nature” of the TLA product.

That is to say, despite the polite fiction that underwriting banks intended to hold on to their TLAs, in practice it appears they might be ready to jump at the first chance to offload this exposure.

Recall, back in September, Spain-based KronosNet, the combination of call centre operators Comdata and Konecta, had to downsize its TLB from €450m to €400m, and upsize its TLA from €350m to €400m, as reported by 9fin’s Laura Thompson at the time.

So, the €50m gulf was swallowed, at least for a while, by the underwriters. With loan markets having rebounded in recent months, leads BNP Paribas, Credit Agricole, Deutsche Bank and JPMorgan likely spied an opportunity to offload that exposure.

KronosNet’s add-on was launched as a €50m minimum deal, but scored €95m, pricing Wednesday at 92 OID (the same as the original TLB back in September). Lender pushback saw an MFN provision in the TLB extended to 12 months following issuance, putting a floor at 92… so the banks couldn’t dig deeper to place more of the debt.

Two’s a Trend

They say once is by chance, twice is coincidence and three times is a pattern. We may not have quite reached the threshold for a trend yet, but we’re well on our way: 888 Holdings came out with its well-flagged high-yield bond tap Monday, with proceeds also earmarked to take out the company’s £347m TLA.

Initially the UK-listed gaming operator sought to raise a €200m tap, split across its 7.558% 2027 SSNs and E+550 bps 2028 SSFRNs, which would partially take out the TLA that 888 Holdings used to redeem the William Hill 2026 bonds when the former acquired the latter this year.

In the end, 888 both upsized the bond tap - pricing a €182m 7.558% 2027 SSNs at 84.5 OID (vs 85.35 OID when placed in July) and €150m E+550 bps 2028 SSFRNs at 87 (vs 85 in July) - as well as placing a $75m add-on of its S+CSA+525 bps 2028 TLB at 85 OID (in line with July’s pricing), meaning the TLA could be taken out in full.

JPMorgan and Morgan Stanley led the new deal, while Barclays joined as bookrunner.

The smaller discount on the SSFRNs when compared to the July placement (as compared to the larger relative discount to place the SSNs) suggests there may have been relatively more demand from investors playing in the floating rate space (perhaps some CLO dry powder being put to work, or investors just preferring floating notes as a hedge against rising rates).

The fact the issuer opted for a larger fixed-rate tranche perhaps seems counterintuitive at first glance, given that the SSFRNs priced at a smaller discount and - at today’s 3M Euribor of 1.993% - carry a marginally lower interest cost (at least for now).

But the economics of the SSN tranche are likely preferable once costs associated with swapping floating rate into fixed rate are accounted for, something 888 Holdings intends to do (as well as swapping euros into sterling), as the company noted in its bond marketing materials.

Indeed, 888 Holdings bemoaned the large portion of floating rate debt (64%) compared to fixed rate (36%) in its capital structure during its capital markets day last week.

Other TLAs in the Wings

Thinking forward to what other exposure banks might look to take out, a screen of 9fin data for TLAs placed year to date in 2022, filtered by issuers active in the European HY and leveraged loan markets throws up a handful of names.

In the euro-denominated space, Inetum (€533m), Flutter Entertainment (€750m) and Courir (€80m) stand out. Of course, there remains the possibility that underwriters intended to hold onto these deals from the start - but if not, we may see additional supply emerge if the markets remains conducive.

TLAs raised in 2022 by issuers active in Europe

Movement in leveraged loan market share

It turns out that those seeking insight into the leveraged loan market could do worse than ask an equity analyst. A helpful note published Friday by Jefferies’ European banks equity research team suggests “pressure is mounting but remains manageable” from banks’ leveraged loan exposure.

“Recession fears, higher debt & rising rates put LL exposures at risk. Default rates are rising but still contained, while potential capital add-ons should be limited,” the analysts wrote.

US default rates are expected to head toward 2.5-3% in 2023, which - while unhelpful - remain a far cry from the roughly 11% seen during the GFC and 4% during Covid-19, they added.

Of the European banks surveyed, BNP Paribas was most exposed in terms of leveraged loans as a percentage of CET1 capital, at 17%, followed by ING Bank at 14%, then Credit Agricole at 12%.

Overall volumes in the leveraged loan market have plummeted this quarter to the lowest level in years (admittedly there are another three weeks to go, though it’s hard to imagine a late-year splurge making up the shortfall). On an annual basis, volumes are similar to 2020 when Covid-19 was at its height.

In the EMEA region, the industry leaders in 2022 by market share were JPMorgan, Goldman Sachs, BNP Paribas and Barclays. Meanwhile, BNP Paribas, HSBC, Credit Suisse and Deutsche Bank lost market share to Barclays, Citi, Bank of America and Santander.

In the case of BNP Paribas and Deutsche Bank, the Jefferies analysts attribute this to lower risk appetite and the possibility of capital add-ons for leveraged finance exposure from the ECB, while for Credit Suisse it may stem from lower risk appetite coupled with capital constraints.

There may not be enough time left in the year to meaningfully change the volume rankings, but a couple of loan deals remain in the market - commitments due next Tuesday for both Parques Reunidos’ €225m four-year TLB (guided at E+525 bps at 96 OID) and Safic-Alcan’s €470m six-year TLB (guided at E+512.5 bps).

There’s also been a string of smaller sized deals with limited marketing processes hitting the market.

Cerba Healthcare opted for a more private process to ship out a €220m Term Loan D to pay off its RCF. Existing lenders to the EQT-backed labs testing business are the most likely participants. The firm has had to cope with the unwind of exceptional Covid profits, but it's well understood with a decent fanclub, and the chance to own the name with a more CLO-friendly 550 bps margin (vs 400 for the term loan C) was doubtless appealing.

Pharma manufacturer Barentz also opted to clean down its RCF, finalising its €150m add-on, a deal that's been in market since 24 November. It's a similarly defensive proposition, though the margin of 375 bps is somewhat less friendly for CLO investors. But the small size may have dictated an add-on rather than a new tranche. We have the outstanding loan marked at around 96.5, according to 9fin data, so at least you get paid for playing the new issue.

Adding to this bitty dealflow is €75m of team.blue, also to pay down RCF drawings, and a further €73m in Emeria (Foncia) for much the same reason. Not much to see here, though we note that the last full sized team.blue financing was a two handed job with Credit Suisse and JPM, and it's only the US bank looking after this one.

European Deal Tracker

ChatGPT Roulette

In search of an early Christmas present (and keen to learn when my job will be stolen by a robot), this week I asked much-hyped A.I. chatbot ChatGPT to come up with some good news for financial markets in the year ahead…

The good news (at least for my future employment) is that the Elon Musk-backed chatbot’s limitations are self-evident, its optimistic predictions for a low-rates-driven stock market rally and economic rebound look hopelessly passé. Not too surprising, given the data feeding the bot cuts off in 2021 and the A.I. doesn’t have access, at least so far, to the internet.

As it stands today, ChatGPT’s prognostications seem little more than a sore reminder of happier days.

(As an aside, did Elon prod the development team to turn the self-promotion dial up to 11? Asked to elaborate on the tech innovations, ChatGPT not only talked itself up, but also gave Tesla a quick plug for good measure…)

Back in the real world, pessimism abounds. As Shard Capital’s Bill Blain wrote in his Daily Porridge column earlier this week (without necessarily buying into the woebegone mood himself):

“It will be tough. It always is. Markets go up. Markets go down. Figure it out.”

“What interests me more is sentiment – as the bull market euphoria of the last decade fades, across the globe it has left a deepening pandemic of economic depression in its wake. The news is resoundingly bleak […] Crashing sentiment is a powerfully depressing economic force – influencing the way companies, government and consumers behave and plan for an increasingly uncertain future.”

But, likening the process of QE coming to an end to going and markets going cold turkey, Blain argues that next year could offer a much needed dose of reality: “The 2023 markets might be difficult, but at least they might start to make more sense.. and that will be a good thing…”

So, it looks like cold turkey might have to make do for my early Christmas present.

Movers & Shakers

Among the biggest movers of the week was Bain Capital-owned Italian plastic and rubber manufacturer Italmatch’s €650m E+475 bps 2024 SSFRNs (although, as FRNs, they are not picked up by the screener below).

The notes popped nearly six points, to be indicated at 96.2-mid, after the company announced last night that Saudi Arabia’s Dussur would inject €100m equity into the business, which - combined with a stake purchased from Bain - will result in Dussur holding 20% of the business.

Excluding stressed credit (STW < 10%), the following euro-denominated fixed-rate bonds saw some of the biggest week-on-week moves in spread to worst (STW) terms, according to 9fin’s European price moves screener.

HY spread risers (price declines)

HY spread decliners (price risers)