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Volume slows in Fed, CPI week but loan-add on activity picks up

$2.35bn of high yield bonds and $33bn of leveraged loans priced this week

HY supply hits $10.9bn in June; loan market has allocated almost $85bn MTD

One of the axioms of leveraged finance is that companies should take the money when they can, and that’s exactly what they’ve been doing in the loan market this week with a number of add-ons alongside continued repricing activity, in the absence of substantial M&A volume.

Authentic Brands highlighted the trend this week with a fungible $600m add-on to its existing 2028 TLB to fund the company’s acquisition of clothing brand Champion Sports. The add-on was upsized and the original $3.333bn TLB was repriced at S+275bps, which is in from its original margin of S+CSA+350bps.

Other companies taking advantage of the add-on and repricing trade in the past two weeks include insurance provider Amynta (rated B3/B-), fintech firm Planview (B3), IT services firm Virtusa (B2/B) and packaging company Veritiv (B1/B+). The increase in debt-funded dividends is another sign of the times.

High yield supply however was fairly muted with just four deals priced totaling over $2bn this week.

Commentary from loan traders on Friday also suggests that liquidity may be tougher next week around the Juneteenth holiday along with heavy BWIC volume and the primary market calendar starting to create some fatigue.

“Liquidity is not great,” said one HY investor this week. “There's too much cash to put to work and too much cash on the sidelines. New issue gets eaten up and secondary is pretty tough to trade in.”

Month-to-date primary activity (via 9fin)

With continued inflows to high yield and loan funds — $5.3bn and $12bn respectively YTD, per JP Morgan — credit spreads are as low as they’ve been in the past 12 months. JPM sees average high yield spreads at 344bps, just 9bps wide of the LTM low, and loan spreads at 459bps, just 2bps off the LTM low.

“Take the money,” is the advice that Mike Meyer, CEO and head of capital markets at Union Square Advisors, is giving to corporate clients. “It feels like we’re back to 2021 when the credit markets were so incredibly attractive.”

While investors may gripe about the supply-demand dynamic, there’s not much in terms of substantial LBO or M&A flow that could change things any time soon.

“There's really not enough paper out there for the amount of capital that's looking to be deployed,” said Meyer. “The broadly syndicated loan markets have gotten more competitive, with the CLO market driving that. Banks are back in the market and private credit funds are just flush with cash.”

Overall, $2.35bn of HY bonds priced this week, down from $8.5bn in the week prior. The loan market saw $33bn of deals priced (including repricing and refinancing) down from $51.5bn last week.

There was some new money activity this week.

Last year, Blackstone acquired a majority stake in Emerson’s HVAC business in a $14bn deal that rebranded the segment under the name Copeland. Now this week, Copeland is back in the market with a $950m TLB due 2031 to fund the sponsor’s $3.5bn purchase of the remaining 40% stake from Emerson. Commitments are due 18 June with price talk at 250bps-275bps and 99.5.

Healthcare staffing company Soliant Health is marketing a $1.29bn TLB due 2031 to fund its acquisition and recapitalization by Vistria Group, which is buying the business from Olympus Partners.

E&P company Matador’s acquisition of certain assets from EnCap-owned Ameredev could also add some new paper to the primary pipeline. We unpacked what the potential debt package could look like in this article.

Signals from the Fed and benign economic data this week may also help unblock some deal flow.

“The cooler inflation read [on Wednesday] is fodder for optimism among leveraged finance participants, where the technical imbalance has been fueled in part by the lack of new money deals,” said Fitch Ratings managing director Lyuba Petrova. “Potential rate cuts in 2024 and 2025 will likely open a flow of pent-up M&A and LBO activity that has been sidelined by the disconnect over valuations and prohibitively expensive capital.”

Some of the trickier refinancings 9fin reported on include Asian-themed dining chain PF Chang’s, which is planning to refinance a term loan due 2026 via JP Morgan. The move comes as the company projects an EBITDA increase over the next few years.

JP Morgan also led debt refinancing transactions for B3-rated ModivCare and Frontier Communications this week — ModivCare is seeking a $525m TLB due 2031 to refinance existing debt due 2025 and revolver borrowings, while Frontier is making use of both ABS and the leveraged loan markets to refinance a TLB due 2027.

A successful Frontier refi may bode well for Zayo, which is working with banks to gauge investor interest in raising new debt at its Zayo Europe subsidiary.

Our credit team also speculated on the refinancing prospects for gym chain Life Time Fitness, which has staged an earnings turnaround in the past two years, setting up a potential refi of its 2026 maturities.

In the secondary market this week, staffing company EmployBridge’s loan dropped roughly 8 points to 72.88 on Thursday, versus around 80 in April, as declining demand for temp workers hit the company’s first quarter earnings.

Bonds tied to CoreCivic and Target Hospitality also took a hit after the Biden administration announced the impending closure of a migrant detention center in Dilley, Texas to reduce costs.

All eyes are on Hertz’s five-year CDS as the company stands on the verge of a potential ratings slump into CLO triple-C buckets. We reported earlier this week that Hertz protection costs 35 points more than it did at the start of April, when its slide in fortunes began to accelerate.

There were also several loan BWICs issued in connection with the redemption of CLOs (check it out here and here). This trend of BWICs as pointed out by Bruce Richards of Marathon Asset Management means that — for the first time ever — the net size of the CLO market has actually shrunk this year despite record new issue levels.

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