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Ryan Daniel

Despite Fitch putting the US government on negative ratings watch as the debt ceiling “X-date” looms, we won’t be including them in our high yield wrap just yet…

Our biggest highlight from the week was a report from Sky News that the Issa brothers, owners of EG Group alongside TDR Capital, are planning to merge operations with shopping giant Asda, which they also own. The result would be a retail mammoth given its combined total of 600 supermarkets, 700 petrol forecourts and 100 convenience stores. More than 20m customers pass through Asda stores and EG’s UK forecourts each week. See some 9fin analysis on EG Group from April, where we consider the potential for an ‘M&Asda’, and a look at the legal possibilities from January.

No details have yet emerged by the Sky story, which touted a formal announcement as early as Friday, but this is one of the largest capital structures in European leveraged finance. 

6.250% 2025 EUR SSNs (-547bps YTW) and 4.375% 2025 EUR SSNs (-995bps YTW) have both rallied this morning in response to the news.

Around €7.8bn-equivalent of term loans and SSNs are set to mature in 2025, and the company was rumoured to be exploring a refinancing in the first half of this year, as reported. Even if, as our legal analysis suggests, a merger could be executed without triggering the change of control and merger covenants in the outstanding bonds from both companies, this large maturity stack still needs to be addressed.

Management has attempted to bring in some cash by announcing a $1.5bn sale and leaseback (S&LB) transaction earlier this year.

Sky reports that Apollo will be providing some £500m of private placement debt to facilitate the merger, though it is not yet clear where this would sit in the capital structure. We’ll have much more on this as the story progresses — our analysts are sharpening their pencils ahead of any announcement. Just when we thought things were suspiciously quiet…

As was the case last week, bond issuance was light this week. Full year numbers went stale in mid-May, so some companies may be waiting to report Q1 before approaching the market. That gave  Merlin Entertainment a clear run at a refinancing, which successfully upsized and tightened pricing in syndication, though it traded down afterwards. 

The seven-year senior secured notes (B2/B) ultimately priced with a 7.375% coupon at par to yield 7.375%, 12.5 bps in from IPTs. The notes traded down on the break, and at one point were 99.20-99.60 according to one PM, before recovering slightly. Latest 9fin data shows pricing at 99.56.

Merlin, which owns brands such as Legoland, Sea Life and Madame Tussauds, is “seen as one of the strongest European leisure high yield issuers in terms of brand, market position and  diversification,” according to one buysider.

While some saw the transaction, which takes out a 2025 maturity, as a sign of improving market sentiment, some were left unsure about how Merlin will address substantial 2026 maturities (€1.46bn TLB, $1.382bn TLB, a £400m RCF and $400m of SSNs due in 2026. Another $410m and €370m of SUNs follow in 2027).

“They’ve still got some significant maturities coming up and we want that guidance so we can decide what part of the cap stack we want to be in,” said another buysider we spoke to.

“I expect them to address their dollar debt first given how FX is playing out,” said a second buysider, adding that they also expect the company to separately consider buying up its SUNs given they’re trading at a discount of mid-90s and high-80s, according to 9fin data.

Pricing was viewed by one source as being on the richer side. “The bond is pricing tight for B2; it’s probably pricing more like a B1,” noted a high yield portfolio manager we spoke to, who has held Merlin's bonds since 2019.

The overarching sentiment on Merlin is that it is a good credit long-term, even if it has some headwinds in the short-term (e.g. demand for Merlin’s sites won’t prove recession-proof). 

Multiple buysiders saw room for optimism and a runway for more growth — pointing to new Legoland parks that opened recently in New York and South Korea, with expansion in China also expected after 2026. “As they spend growth capex, this will significantly add to EBITDA,” the HY PM said.

After coming to market last week, Solenis (the speciality chemicals manufacturer) priced a euro tranche as part of its broader package for Diversey on Wednesday. The company offered investors both dollar and euro notes. The former came through $1.7bn SSNs due 2028 — priced at 9.750% (settling at the wide end of 9.625-9.750% price talk). The euro deal settled on €630m SSNs due 2028. Pricing was 9.625%, from 9.625-9.750% talk. In case you missed it, last week we released a piece digging into the proposed Solenis and Diversey merger that triggered this funding in the first place.

Altice France (SFR) ( 8% 2027 SUNs down 9.2 points on the week to land at 58.4) has been a concern for high yield investors this week. The French telco firm unveiled underwhelming Q1 results, with EBITDA down 5.4% year-over-year and Net Leverage increasing from 0.1x to 5.8x.

In response to being asked whether this could have any read-across for telcos or high yield more generally, the high yield PM said it was company-specific and that the price movement seen this week in the name shouldn’t alarm seasoned high yield investors.

“It’s nothing that’s crazy (around five to eight points)…not to worry.” 

For more colour from a busy earnings season, check out the latest Earnings Digest from the team.

Groupe Casino (3.248% 2024 SUNs down 6.8 points over the week to land at 20.6) also had a difficult week as the French retailer said it was officially starting court-backed negotiations with its creditors. As per latest reports, Casino had a consolidated net debt of €6.4 billion at the end of last year and it faces €3 billion' worth of debt repayments in the next two years. For more details, check out our piece on the company from earlier this week. As mentioned in this week’s Friday Workout, five year CDS referencing Casino widened only 1.25 points on Wednesday to 77.25 points up-front (PUF), its most stressed level ever, leaving little payout to any protection buyers with IHS Markit assigning a real recovery rate of just 16.4%.

Looking at the space more broadly, the High Yield PM expects more high yield companies to come to market and refinance ahead of a possible recession.

“They’d want to make sure they’re pushing out their maturities as nobody knows how bad it (the recession) would be. You’d want to refinance at least a year before. You don’t want to leave it until mid-2024 because the market might close (during recession).”

Another point worth thinking about is the trajectory for government bond yields from here. Our source projected the 10-year Treasury getting back to 3% long term (with the 10-year Bund back to 1.5-2%). 

Before that though, defaults are expected to pick up which some are prepared for but others could be caught offside.

“The smart guys are ready but there are some people that shouldn’t be in high yield right now.” 

The PM pointed to private banks buying the asset class for their high net-worth clients as well as the interesting point that some investment grade portfolio managers have been dipping into high yield to beat their benchmark.

Following the example of bond market issuance, new issue loans was sleepy again, with a small add-on from Affidea the only public deal.

Affidea, European medical service provider, settled on a €170m (originally €150m) TLB add-on. The loan will mature in June 2029 (the same as its existing TLB). Margin will be the same as its existing TLB at E+500 bps. The OID landed at 98.5 from price talk of 98 (+/- 0.5pt). According to the final terms, the proceeds are for bolt-on acquisitions, drawn RCF repayment, general corporate purposes and to pay related fees and expenses. 

IU Group — Germany's largest university group with more than 100,000 students enrolled. The company slipped out a €70m TLB add-on last Friday, after the LevFin Wrap had gone to press. It was priced with a E+4.75% margin at 98. Reported use of proceeds are to repay the RCF drawings and to fund cash on the balance sheet.

The poor numbers from Altice France (SFR) filtered through into the loan markets — its €1.724bn Term Loan B sank 7.6 points on the week. Altice International felt some strain too, though it reported two weeks ago — its €1.6bn Term Loan B down 4 points on the week. 

KKR-backed Genesis Care’s loans got hit this week too upon news of the healthcare provider prepping for bankruptcy. Its Term Loan Bs were down as much as 7.4 points over the week to settle at a price of 22.2. Part of the significant debt burden can be attributed to its acquisition of 21st Century Oncology in December 2019.

Demand is potentially strong though, given supportive conditions in the CLO market. One analyst we spoke to described the European CLO market as an “incredibly attractive opportunity which has spreads up to 2.5x of credit quality-equivalent European high yield bonds”. 

He suggested that CLOs are offering more attractive risk-adjusted returns than high yield given that the latter is not “fully pricing in a global recession that may come later this year or early next”. 

They pointed to M&G’s recent foray into the CLO market as well as rumours of PIMCO entering the fray as examples highlighting the opportunity set. 

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