US LevFin Wrap — All pain and no gain as Brightspeed goes dark

Sasha Padbidri
+William Hoffman

30 September 2022•6 min read

From the meltdown in US Treasuries and UK Gilts to the Brightspeed buyout financing saga, pain was the overriding theme of the week.

Treasuries whipsawed, with the 10-year yield soaring to a nearly 14-year high before experiencing its steepest intra-day decline since 2020 on Wednesday. Gilts had an even crazier week as the the Bank of England was forced to intervene to stabilize the market.

The volatility in sterling (which our London team has unofficially renamed the North Atlantic Peso) was sparked by the UK government’s disastrous mini-budget. For more on that fiasco, see our European wrap — here, we’ll focus on how volatility is impacting the US.

So how to describe the US credit markets this week? ‘Extreme discomfort’ might be a diplomatic way of putting it.

Not-so-Brightspeed

Just when it seemed like the Citrix syndication had created a playbook for banks to offload bull-market LBO debt with increasingly bearish investors, banks were forced to pull Brightspeed’s debt offering from the market.

The bank group, led by Bank of America and Barclays, officially postponed syndication of $3.9bn of the debt on Thursday. The committed financing backs Apollo’s carveout of internet assets from Lumen Technologies.

The acquisition is still expected to close next month, but for now it looks like the banks could conceivably end up funding the debt themselves.

Brightspeed’s aim is to transition away from wireline telecoms and bring fiber internet to rural areas in the Midwest and Southeast, competing with high-speed internet providers such as Charter, Comcast and Optimum (more on that transformation plan here).

Investors’ skepticism around that pitch definitely played some part in the failed syndication. Poor timing was clearly a factor too; the deal was launched just before the Fed hiked rates yet again.

Lower than expected ratings (B3/B-/B-) probably didn’t help. Bankers familiar with the deal lamented the ratings’ agencies decision to factor Apollo’s equity back-leverage into their credit analysis, even though the sponsor itself is solely responsible for that facility.

Buysiders complained about the treatment of outstanding bonds from Embarq that were set to be rolled over into Brightspeed’s cap stack and thus structurally subordinated. The notes, which were issued back in 2006, plunged nearly 30 points after the deal launched.

But perhaps most damaging to the syndication was the deterioration in the broader market. Average HY yields have widened by 91bps since Brightspeed launched its bonds, at 9.5% as of yesterday.

In this kind of environment, there simply aren’t enough buyers for any kind of credit. Some observers are officially labelling the new-issue market shut for the rest of the year, and plenty of 9fin sources agree.

“There are probably just four or five buyers of high-yield debt right now,” said a leveraged finance banker. “I don’t see this getting fixed by the end of the year.”

All pain, no gain

What to do with all that LBO debt? It may be a case of adapt or die.

As we saw with the long, drawn-out drama of the Citrix syndication (which may return for a second season in January, when the TLA lockup agreement expires) banks are being forced to pull out every trick in the book to manage their bridge exposure.

Creating emergency TLAs, tapping up sponsors or sovereign wealth funds for anchor orders, giving in to lender demands for lockup periods or even a syndication MFN: all of these options now have to be under consideration when shifting an LBO commitment.

In this week’s episode of our Cloud 9fin podcast (which had its first birthday earlier this month, thank you for your support) we discuss what is fast becoming a new paradigm for underwriting and syndicating buyout debt.

Of course, in order to employ this new-look syndication playbook, banks need at least some semblance of a market to syndicate into. After this week, that’s no longer a given — so what does that mean for the likes of Tenneco, Nielsen and Tegna?

Refi routes

There’s been a lot of focus on LBO debt lately, but bankers aren’t the only ones who might need to get creative.

Time is ticking for companies like Data Axle, which has $250m of debt coming due in just over six months and has yet to lay out concrete refinancing plans.

In our piece on potential stressed refinancings, we identify several other leveraged borrowers with debt due within the next 18 months — such as Cooper Standard, Audacy, Casa Systems, DISH Network and Ahern Rentals — could also face similar challenges.

Amendments are a classic option (possibly with the addition of a partial paydown), as is private credit — but persuading existing lenders to extend will be expensive, and the private credit market is markedly less bullish than it used to be.

If all else fails, sponsors may simply choose violence.

“Docs are loose enough that companies may be able to do some financial engineering and find ways to create liquidity that we as lenders are not yet thinking of,” said a portfolio manager at a leveraged loan mutual fund.

Of course, there’s always restructuring — and our distressed debt sources are already watching the space like hawk.

“It’s a slow-motion train wreck,” said one distressed source of today’s market.

Chemical burns

The pain is not limited to primary markets. Third quarter earnings are likely to reveal substantially more discomfort, especially in the chemicals sector.

Several chemicals producers, including Chemours, Tronox, Avient and Huntsman, have warned investors of a gloomy outlook for earnings amid rising costs and a worsening economic outlook, as we wrote earlier today.

Chemours and Tronox in particular could also face additional pressure as a lot of the chemicals they produce, like titanium dioxide, are used to make paint. With mortgage rates spiking and pandemic renovations tailing off, demand for paint is likely to drop.

If all this pain has you needing some Tylenol, why not head over to your local Rite Aid and contribute some much-needed revenue? The company reported on Thursday that its retail pharmacy sales are falling, amid store closures and slowing Covid tests and vaccinations.

Following the blueprint set by the chemicals producers, Rite Aid also lowered its adjusted EBITDA outlook for fiscal 2023 to $450m-$490m, versus $460m-$500m previously.