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The news of the Omicron variant exploded into markets last Friday, pushing risk assets down, drying up liquidity and causing primary bond deals from Reno de Medici and Phoenix Pharmahandel to be postponed.

But with CLOs still coming to market and lots of previously issued deals still ramping, the loan market remains technically well-supported, with relatively minor moves in all but the most Covid-affected names, and investors seeing a chance to buy the dip on the better credits.

Omicron worries, however, may have given the perfect excuse for some underwriters and investors to shut up shop early after a hectic year, with a limited execution window for more primary before Christmas and liquidity thinning out. Especially, after a mammoth year for issuance where many accounts were able to hit the targets earlier than usual.

For more stressed or Covid-hit credits, the market is effectively closed, pending further data — which means story credit refis will almost certainly be pushed to January. 

Five new issue CLOs in Europe have been priced since the Omicron news hit — Barings 2021-3, Invesco VII, Tikehau VI, Fair Oaks IV and Hayfin Emerald VIII — with resets on Oak Hill VI and Henley III.

“We saw one or two accounts come in on Friday and cancel any order they had outstanding, pending more information on the variant, but that was marginal,” said a CLO syndicate manager. “But in general books held together pretty well, and deals continued to get done at reasonable levels. There’s been most softness at the bottom of the capital structure but only 1 or 2 bps at the senior, and overall cost of capital is still attractive.”

These vehicles have to be ramped in the weeks and months ahead, with managers incentivised to deploy cash as quickly as possible — which will provide a strong back bid for secondary loan markets into the winter.

“CLO arbitrage is still extremely attractive at the moment and CLO formation is definitely going to continue,” said the banker. “Some equity providers may prefer to wait until the New Year to get deals executed, but we expect the pipeline to remain strong.”

Deals which have been priced since the Omicron news broke were already in the pipeline, but there’s still a potential primary CLO window before Christmas, according to two bankers — though it depends what state the deal is in.

“We wouldn’t advise doing a new deal now without any anchors in place,” said one banker. “But if you have done some premarketing already it’s possible to get something done, and if you’re doing a reset or a refi there’s certainly a window.”

Primary loans and bonds in the market before the Omicron news have not come through unscathed — but deals have been getting done, at a price.

Reno de Medici, an Apollo-backed Italian packaging firm, delayed its €445m FRN on Friday, pricing on Tuesday this week instead at the wide end of initial talk at E+ 525bps and with an extra point of OID at 98.5.

“This was already struggling before Friday, this has nothing to do with Omicron,” said a CLO analyst on the deal. “ It was because of the [increases in] raw materials prices.”

“A big unknown is raw material inflation, that doesn't yet translate in numbers for a lot of companies, it hadn’t picked up until after the summer and for third and fourth quarter reporting it remains a bigger risk than COVID-19,” said a second CLO analyst. 

First analyst cited the  €43.5m EBITDA normalisation addback (based on recouping via price rises, the increased raw materials costs, but with a time lag of several months) as a big impact on why syndication did not go smoothly. “Kloeckner Pentaplast bonds are down, everyone is getting hit by raw materials and when you come as saying lets exclude that from EBITDA, that is garbage,” they said. “Then it is not a 3.7x levered business, but 6x levered, so do I want to look at it when similar credits pay up to 8%?”

Oakley Capital-owned private university firm IU Group, in market via JP Morgan with a divi recap, widened talk on Wednesday morning, along with a package of docs changes, to add an extra 50 bps on the margin to E+ 500bps and increase the OID from 99.5 to 98, as well as pushing out call protection to 12 months.

But the revised and cheaper deal has evidently delivered some price tension back into the book, with final OID cut again to 98.5 on Wednesday afternoon. Buysiders 9fin spoke to had issues with the deal pre-Omicron, highlighting massive EBITDA adjustments and an aggressive divi approach from the sponsor — though some simply wanted to be paid more for a B3 credit, and may have liked the deal at the revised levels.

Guidance on Ardian-owned labs firm Inovie’s €775m TLB is circulating at 99-99.25 OID, for a 375 bps B/B2/B-rated loan — relatively cheap for the rating and sector, but hardly indicative of a truly struggling market as it was announced prior to the new variant news. Arguably, the testing provider of PCR testing is much better positioned to not be affected by possible lockdown volatility and should have a smoother sail through syndication. 

“I don’t expect price talk to move,” said the second analyst looking into the deal.

“If it trades down, it is just purely market related, just because people will be saying B2 now pays over 400 bps, so pay me up.”

On the big tickets, however, liquidity dried up and did not leave enough window to launch some of the larger underwrites before year-end. The £6.6bn-equivalent debt package for CD&R’s buyout of Morrisons has been postponed to 2022 and likely to be weighing heavily on the balance sheets of underwriting banks, even though it has already been pre-marketed to selected investors, 9fin understands.

According to the underwriting documents, released as part of the UK take-private process, the cap levels are 5.25% on the senior secured sterling, 6.5% on the unsecured sterling, and 5.75% on the unsecured euros. Asda’s outstanding £500m and £2.2bn secured sterling debt, potentially better rated, are now yielding around 4.8% and 4.4%, respectively.

Other large deals that were intended for Q4 include the financing for Advent and GIC’s $8bn buyout of Swedish drugmaker Sobi and the bond leg of T-Mobile Netherlands (downsized after a successful loan syndication). Advent and GIC shelved Sobi on Friday (3 December) after they failed to reach the 90% share threshold needed for the deal's approval, LPC reported.

“Big deals like Morrisons and likes are coming next year and we already don’t see a couple smaller ones that are supposed to come this week,” said a CLO analyst. “If you don't launch in the coming days, timing is becoming tight.”

Buyside and sellside agrees that the loan market is more resilient compared to bonds as it has underlying CLO formation as a recurring positive while bond market investors are much more spooked by the sentiment also due inflation risks. So while CLOs can be still ramping up and capable of filling some books, bond demand is lower as the market is going through a shift from fixed rate to floating to mitigate possible tapering of central banks in 2022. 

“Naturally the loan market is more sticky. But markets were already softening prior to the variant. We are not saying deals can’t be done, but we see issuers stepping back and assessing volatility,” said one LevFin syndicate banker, “I bet you will lose some of the issuers next year, but I was seeing losing people from the market prior. I do think the rebound this week made people start to look again at the market.”

Even against stronger technicals than bonds, virus exposed loan names were not left unscathed this week. French campsite and mobile homes operator Vacalians has seen its loans suffer the most falling 3.75-points to 92.25 from 96 on Wednesday (1 December). Dutch retailer Hunkemoller followed with slashing three-points to 90.25 on last Friday (26 November) and Cineworld lost 1.75- points on one of its TLB to 83.5 Tuesday (30 November).

“No one wants to put themselves at risk coming into the new year. You are in a more cautious position. Do you wanna be in a hotel chain or travel exposed name as there is no upside between now and Christmas? At the same time we were looking at names that we did not buy before.”

As the pandemic situation repeated itself and the market already saw a recovery this week, many were keen to pick up the discount.

“This time, everyone was buying the dip,” said a third CLO analyst. “COVID-19 has been in Europe for ages, it is not a real concern anymore.”

The new variant is making investors reassess their portfolio against possible prolonged lockdowns. Slovakia, Germany, Austria and Netherlands reintroduced partial or full lockdowns and other European countries are weighing-up new sets of restrictions. 

“Sixth wave, seventh wave, life is getting better, because companies are [better] set up to deal with the issues,” said the second analyst. 

Investors are betting on economies staying relatively resilient and seeing less and less impact with each new lockdown. Care homes are a good example. They have suffered through quite a dramatic first wave but currently staff and residents are vaccinated, testing is in place with cases contained and with further guidelines on how to deal with lockdowns, added the second analyst. 

Travel and leisure sectors could still be under significant strain from government actions with destinations coming back on red lists. “You can’t do much there, you can give people vouchers again and hope they will travel later,” adds the second analyst. 

This year many issuers came in with COVID-19 related earnings adjustments with a recovery promise for later this and early next year. New lockdowns may stress cash flows more and for longer than expected. Nevertheless, investors are calm as they were assessing credits by FY 2019 metrics and were seeing signs of performance picking up from this summer. 

“If you look at pubs, their earnings were shattered and will be again, so when you are buying you are looking at it through LTV and assets they have. If you are comfortable then, you are not worried about more restrictions,” said a fourth CLO analyst. 

Therefore prices are not as affected because investors are looking at the credits further than one more lockdown and expect companies to still return to pre-pandemic levels, just with a delay. 

After the first lockdown some companies benefited from new liquidity when sponsor or direct lenders came up with funding packages to help cover cash burn. Investors are still positive that current market conditions will not dry up and corporates can still tap extra cash - if needed, in new lockdowns. 

“I think it is still possible. There is a bit of noise about rates - if they increase that might change - but so far money remains very cheap, said the second buysider. “I am not saying it is super easy because they are heavily impacted, but most virus names are relatively well placed for liquidity,” they concluded.

9fin provides exclusive news and analysis of the European leveraged loan market. In addition to news alerts, you can search financials, build comparisons and access covenant wording and data within the platform. 

If you would like to see the full functionality of the platform please email team@9fin.com for your trial. 


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