US LevFin Wrap — Avaya dodges convert cliff, Dave & Buster’s and CAA highlight recession fears

Will Caiger-Smith

23 June 2022•5 min read

Discount mania is sweeping across the leveraged finance market, so we should probably start this week’s wrap by talking about Avaya.

The perpetually troubled communications company is poised to complete its refinancing, but is paying through the nose for it. At a final spread of SOFR+ 1000bps, the coupon on its new term loan is the widest we’ve seen in the primary for a very long while.

Officially, the deal is priced at par, but buyers get a 10 point upfront fee. Economically, that’s much the same as the deal being priced at 90 — but this way, holders lock in their upside right away, rather than having to rely on a strong secondary market or wait for a par redemption.

Call protection was boosted, so Avaya’s new loan looks a lot more like a bond (non-call three, then 104, then par). We’ve seen that before, both in relatively recent transactions (like Delivery Hero) and in loans that priced in the depths of the pandemic with similarly lofty coupons.

Avaya’s loan was also downsized to make way for a new secured convertible bond. That wasn’t part of the deal when syndication began; you may also have noticed that JP Morgan wasn’t initially on the deal, but is now listed as an arranger alongside Goldman Sachs.

All in all, not exactly the most straightforward syndication. But as painful as this transaction has been for Avaya, it may save the company from something a lot worse.

The $350m of busted converts Avaya is taking out mature next year. That maturity is roughly equivalent to the company’s entire market cap — and while Avaya had $324m of cash at quarter-end, a lot of that will burn away as the company moves to a subscription sales model.

Put all that together, and it starts to seem like Avaya had little choice but to accept the pricing the market demanded.

Take the hit

In that sense, Avaya’s eye-catching deal is a warning to companies that are waiting around to refinance — not that there haven’t been plenty such warnings already.

Even a month ago (when the ICE BofA high yield index was nearly 100bps tighter) issuers like Carnival were proving how costly it was to leave refinancing to the last minute. Anyone who is still waiting to go now will need to face this new reality.

“Nobody wants to issue at what they view as an artificially high coupon,” said Hunter Hayes, a portfolio manager at Intrepid Capital.

“And no one's really adjusted to the idea that the new normal is high single digits for junk debt. That's basically what you'd have to offer for a credit-worthy company right now.”

It goes without saying that this environment spells trouble for underwriters — as we discussed on this week’s episode of our Cloud 9fin podcast, losses are mounting for investment banks. Just this week Bloomberg reported that Citrix’s three lead underwriters stand to lose $100m each.

This backdrop also makes some treasury teams look very smart. Take Royal Caribbean: it has two big maturities next year, but it outsourced its refinancing risk to Morgan Stanley through a backstop agreement. That deal was struck in February this year, before markets sold off.

We understand the agreement is not subject to caps like an LBO commitment, so fee wipeout is less of an issue. But Morgan Stanley could end up holding a lot of Royal Caribbean paper if the market isn’t receptive next year (clients can see our full story here).

Discretionary = very scary

Two acquisition financings, both priced this week, offer another lesson about the state of primary markets today.

First up, Dave & Buster’s. More than two weeks ago, the restaurant and gaming company launched syndication of an $850m term loan to fund its acquisition of Main Event Entertainment — this week, it finally hauled the deal over the finish line with the help of its Deutsche bankers.

But it took some doing. Compared to Avaya, the pricing flex was pretty modest (an extra point of OID, and another 50bps of spread). But the list of covenant changes was pretty long, and that gives the company far less wiggle room than it wanted.

Compare that with Creative Artists Agency, which priced its $325m term loan B-2 at a coupon of SOFR+ 425bps and an OID of 96.25, both bang in line with talk. Bankers at lead arranger BofA will surely be pleased with that outcome.

Proceeds of the loan fund CAA’s acquisition of rival talent agency ICM Partners, a mega-deal for the talent agency industry.

That merger is not without its risks (for example, the growing list of of agents leaving ICM as the merger drags on), but the fact that the financing priced in line with talk suggests investors are more comfortable with CAA as a credit than they are with Dave & Busters.

This may come down to the increasing likelihood of a recession, which is making investors much more skeptical about companies with exposure to consumer spending.

CAA’s business is more tied to the sports and entertainment industries than it is to the consumer; whereas Dave & Busters falls pretty squarely in the camp of discretionary spending, opening up more risk of a recessionary slump in sales.