US LevFin Wrap — BBB squeezes through, 888 takes the weekend

Will Caiger-Smith
+William Hoffman

1 July 2022•5 min read

Another week, another 10 point discount: this time on the term loan backing BBB Industries’ buyout by Clearlake Capital. A day after the original commitment deadline, the JPMorgan-led bank group added five points of OID to squeeze the deal through before the July 4 holiday.

British gambling company 888 Holdings also ran up against that holiday scheduling, pushing back syndication of debt for its acquisition of William Hill. The book for the US dollar loan (added to the structure late in the process) was 2/3 full as of Thursday morning.

The commitment deadline was that same day, barely a week after lead arrangers Morgan Stanley and JPM launched the deal. What with the regulatory overhang, the fact that the company has little presence in the US, and the Independence Day weekend, a delay seemed inevitable.

The acquisition has now been completed, according to a press release this morning that also detailed the company’s new management team. Given that and recent market conditions, it is likely that the banks will have to offer bigger discounts to shift the debt next week.

Talk for the US tranche is SOFR+CSA+525bps at 92-93. The steep OID reflects how much secondary has sold off in recent weeks, but even so, several 9fin sources felt it wasn’t big enough to justify buying into the deal, especially if swapping with an existing position.

Since we’re on the topic, we might as well talk about OIDs some more. The challenge for syndicate bankers these days is like threading the eye of a needle — minimizing losses while at the same time, offering a big enough discount to compete with secondary.

That’s no mean feat, especially with pricing moving around so much (although generally in one direction) every day.

At such painful clearing levels, the time is ripe for behind-the-scenes negotiations. Banks may quietly offer bigger discounts to buyers willing to take down big tickets; some 9fin sources even suggest borrowers are occasionally offering to help soften the blow for banks.

It’s a relationship business, after all (we should also note that loans are not securities, which means less onerous disclosure requirements for this kind of activity).

Speaking of relationships: check out our long read (public link here) on the begrudging alliance between investment banks and private credit funds. It features Charlie from It’s Always Sunny in Philadelphia, new kicks from Gucci x Adidas, and a car in take-out packaging.

Lone ranger

And what of high yield? It was slim pickings in primary this week (just as it was in Europe) with just one issuer braving the new-issue market: let’s give it up for FTAI Infrastructure.

Its parent, Fortress Transportation and Infrastructure Investors, is looking to pay down debt by spinning out its infrastructure assets into a new publicly-traded company. It will rely on rising aviation revenues to support the remaining business.

FTAI Infrastructure's assets (an assortment of freight rail, ports, terminals, power and gas) have struggled to generate profit, but are expected to turn a corner in the next 12-18 months, according to a report from Moody’s.

The company was aiming to fund the spin-off with $300m of preferred stock and a new $500m note, but was forced to downsize the bond portion of the funding.

But investors ultimately supported the story, with FTAI able to price its $450m SSN due 2027 (rated B2/B-) with a coupon of 10.5%. But it came at a discount of 94.585 for a yield to maturity of 12%, the wide end of price talk.

That outcome is another sign of investors’ apathy towards primary issuance of late. It’s hard to get excited about new supply when secondary has turned into a yard sale.

“To me buying new issue paper at par or close to par doesn't really make sense when there's plenty of good businesses trading at 70–80 cents on the dollar,” one portfolio manager said.

“Whenever we snap back, that low dollar price is going to be extremely beneficial because your total return is is going to be generated primarily from price appreciation.”

Hitting the wall

Market conditions are only part of the reason HY issuance has been so low recently, of course. The lack of supply is also a reflection of how much debt was refinanced last year, when rates were at rock-bottom.

“Something like 10% of high yield is coming due in the next two and a half years, and it's not until we get to 2025 and 2026 where 30% of the market matures,” said Jason Greenblath, a portfolio manager at American Century. “So borrowers don’t have to come to market.”

Not all issuers hit last year’s refinancing window, though. For more on this, see our full report on companies that are staring down near-term maturities between now and the end of 2024. It’s not a long list, but it threw up some interesting situations.

Among them is Dish Network, which faces a barrage of maturities as it seeks to transform itself into a premier wireless carrier. This week we discussed how pledging its spectrum assets could reduce funding costs.

Another is Royal Caribbean Group, which considerably reduced its maturity risk (although not necessarily the cost of refinancing) by forging a backstop agreement with its house bankers at Morgan Stanley. We linked to our piece on this in last week’s wrap, but here it is again.

Another note on HY issuance: double-B prints are lagging lower-rated issuance by more than $10bn so far this year.

One explanation for this is that higher-rated issuers are more likely to have hit the market last year, before the refi window swung shut. That also makes it harder for primary to reopen properly — consistency can be elusive when supply is dominated by lower-rated deals.

According to 9fin data, double-B issuance this year totals roughly $38bn, across 54 tranches and 46 separate issuers. By contrast, issuance rated single-B and lower totals $49bn, across 68 tranches and 66 separate issuers.