US LevFin Wrap — AMC pays up for Odeon refi, Vericast lenders push back, ESG is finding itself

Sasha Padbidri
+David Bell
+ 1 more

13 October 2022•7 min read

We are two weeks into spooky season and the scares just keep coming. Thursday’s CPI print was a shocker even by this year’s standards (be prepared to pay up for your Halloween candy this year) and core inflation is at a 40-year peak; meanwhile, the high yield index is just shy of 10%.

It’s pretty terrifying out there — but apparently not enough to dissuade AMC Entertainment from taking the plunge with a $400m bond deal issued through its Odeon subsidiary, in what a source close to the deal characterized as an “opportunistic” refinancing.

That sounds about right, in the sense that it’s not every day you get the chance to issue five-year secured debt with a 15% yield. The final pricing (the deal came with a 12.75% coupon and an OID of 92) was well wide of talk, and came alongside a long list of doc changes.

And to think that just eight months ago AMC managed to issue $950m of seven-year secured bonds with a 7.5% coupon, at par.

Scream-stock

At the end of the day, the company had little choice but to pay today’s sky-high pricing. The new debt takes out £148m and €312m of Odeon term loans maturing in 2023, and the dollar market offers a much more stable source of funding than either euros or sterling.

With its immediate maturity runway unobstructed, AMC can ride out a strong calendar of movie releases through the end of the year. “Sure there is a price to pay issuing into this market, but there’s a lot to gain,” said one credit analyst following the transaction.

If the company needs more cash, there’s always retail investors. The meme-stock trend isn’t what it used to be and even this pool of capital has its limits, but AMC’s management team have proven exceptionally adept at harnessing the enthusiasm of the Reddit crowd.

From a credit standpoint, a big issue for bond investors is whether they believe AMC’s European division can perform well in a rapidly deteriorating economy, with plenty of geopolitical noise in the background.

On an investor call earlier this week, AMC executives said Europe was performing broadly in line with its US operations, with revenues and EBITDA around 75% and 35% of 2019 levels, versus 78% and 47% in the US (for more analysis, see our Credit QuickTake here).

But the bargain-basement OID and the litany of doc changes shows that for many investors, the risks — both in terms of AMC’s business and its capital structure — are piling up. Sources noted, for example, that the new bonds have only an unsecured guarantee from Odeon’s parent.

“Your claim isn’t on AMC, it’s on the subsidiary, and it’s not hard to make the case the European consumer is in worse shape than the US,” said a portfolio manager familiar with the credit. “Do you really want to make a bet on Odeon?”

Truck tech

Even at the highest end of the HY rating spectrum, borrowers are having to offer eye-watering yields to raise cash.

Earlier this week freight brokerage business RXO raced through the bond market with a $355m senior secured offering to support its spin-off from parent company XPO Logistics.

RXO positioned itself as a service consolidator in the highly fragmented freight industry. It claims its proprietary technology connects shippers with over 100,000 carriers, many of whom are too small to bid directly for work with the largest companies in the US.

XPO hopes the spin-off will better showcase the value of both this capex-light brokerage business and its own pure-play freight transport business.

Credit investors liked RXO’s low leverage, conservative financial outlook and strong tech offering (see 9fin’s Credit QuickTake here). Moreover, the offer of a 7.75% yield for secured paper on the cusp of investment grade was enticing.

“They priced it right,” said a portfolio manager. “It seemed there was enough reverse inquiry after pre-marketing that it performed well on the break.” The bonds priced with a 7.5% coupon at a cash price of 98.962, but had traded up to just below par by Friday morning.

Scari-cast

Meanwhile, there’s a whiff of creditor-on-creditor violence in the air, as a group of Vericast lenders has reassembled to push back on the company’s latest exchange proposal.

The Ron Perelman-backed marketing provider wants to rejig its capital structure and delay loan amortization payments until 2025, in exchange for tighter covenants. The deal would reduce first lien leverage by exchanging some term debt into new second lien notes and retiring a $50m first lien stub loan due next year.

Chatham Asset Management, which held roughly half of Vericast’s debt stack as of May and earlier this year tried to take control of the company, is supporting the effort by offering to subordinate over $250m of its existing term loan holdings.

But it’s somewhat at odds with the lender group, which is represented by Gibson Dunn. Those lenders want more information about the company’s credit metrics and financial performance, an extension of the 17 October commitment deadline — and they’re worried about being primed.

You can read our full coverage of the Vericast situation here. While you’re at it, you might want to check out our recent piece on how market volatility is ripping up the refi playbook. We might see more situations like this in the relatively near future.

Green blues

It’s a scary time for ESG, too.

Just last month, 9fin reported on Extinction Rebellion’s protest at the SuperReturn US conference in New York, where the group accused private equity firms of “using fancy words like ESG” to divert attention for fossil fuel investments.

On the other side of the political spectrum, Republican-led states have now pulled around $1bn from asset-management giant BlackRock over its support of ESG investing, with the treasurer of South Carolina accusing the firm of pushing a “left-wing agenda”.

Two groups, on opposite ends of the climate change debate, but united in their criticism of ESG. How did we get here?

In our deep dive on ESG’s identity crisis, we do our best to explain. For more, check out the latest episode of our Cloud 9fin podcast, as well as our recent Q&A with Matt Cole, who left ESG stalwart Calpers to join the ‘anti-woke’ investment firm Strive Asset Management.

Bright spots

It’s not all doom and gloom. Amid all the market volatility, investors have found pockets of value in both the primary and secondary market.

“The covenant quality is better in the deals that are coming out today as given the current volatility, investors are able to push back and get better agreements meaning that deals have better protections,” said Leland Hart, a partner at Warwick Capital.

“However, what’s available in the secondary market also looks relatively positive, so there’s a trade-off between price discount and structure,” he said.

And while addressing upcoming maturities may not be straightforward for some issuers, fund services provider Citco Group is attempting a relatively conventional refi to address $780m in debt coming due next year. The offering, which is led by Stone Point, includes a $520m six-year TLB alongside a $275m five-year TLA.

Elsewhere, investors can get their hooks into The Crosby Group, which has lined up an incremental term loan to finance its acquisition of KITO Corporation. The deal is being actively marketed by UBS at a deep discount — check out our full story for more detail.

Finally, over 4,000 structured finance professionals (including a sizeable CLO contingent) are expected to attend next week’s ABS East conference in Miami.

Francis Suarez, the mayor of Miami, is appearing as a keynote speaker. The full agenda is here: if you’re not stuck in meetings or hanging by the pool, check out the macro panel on Tuesday morning, which is moderated by 9fin’s own Will Caiger-Smith.