US LevFin Wrap — Caesars covers the spread as loans roar back to life

William Hoffman
+David Bell

27 January 2023•6 min read

Not to be outdone by the recent surge in bonds, the loan market came roaring back to life this week.

Caesars Entertainment led the charge with bond and loan tranches that tightened well through price progression, demonstrating the continued demand for gaming credits even in the face of a possible recession.

Meanwhile, Roper Technologies and Intrado Safety brought LBO financings. Roper is due next week, but the Intrado deal cleared a few days ago — its carveout from West Corp may have less growth potential than some recent LBOs, but lenders liked its safety and the deal was upsized.

Why the sudden rush for loans?

Investors have cash, CLOs are ramping, and there’s not a huge amount in the pipeline. NielsenIQ is expected to launch soon, and Citrix’s underwriters will probably try to syndicate their second lien holdings at some point, but other than that the forward calendar is light on big deals.

And so, investors are eagerly jumping on new issuance. “Everything is a blowout right now,” said a leveraged finance banker.

The market rally is also a factor. One CLO manager told us that between Christmas and New Year they bought B3s in the low 90s, which they can now sell out of at a profit; that money can then be put to work in new, higher-quality primary deals.

“You sell, take your five points and buy Caesars, which is not going to end up in a CCC bucket any time soon,” the CLO manager said. “Everyone is doing the same thing, that’s why the book is so big.”

Grab-a-thon

Still, some investors are cautious that the market has tightened too much and recent new issues are being priced too aggressively.

“Given the FOMO-type atmosphere and excess cash, people are probably scared of getting too far behind,” said a high yield investor. “We’re fully invested and conservative about our outlook, and nothing has been compelling enough to swap into some of these new issues.”

Average high yield bond spreads have tightened by more than 100bp since September, to 425bp over Treasuries. That brings effective yields back below 8%, levels the market hasn’t seen since last summer, according to ICE BofA data.

“I think spreads have come too far, too fast — it’s been a grab-a-thon,” said a second high yield investor. “It takes 12-18 months for the full impact of higher rates to come through, and my view is it’s going to impact the economy and earnings to the negative.”

Caesars proved another stark example of this tightening. Not only did its bonds and loans price at the tight end of talk, but they managed to greatly increase the size. Sources tell us the orderbook was $6bn just for the loan portion.

The Caesars blowout followed on the heels of a big upsize from Dish Network last week. Here’s our post-mortem on that deal, published earlier this week — we focused on whether the additional proceeds could put more spectrum purchases in reach.

Cash me outside

Even debt-funded dividends have made a comeback.

Chemicals company AOC Resins, thrift store chain Savers and Permian Basin midstream company Oryx all managed to raise debt this week to fund distributions to their private equity sponsors.

As we explored this earlier in the week, investors may not like the optics of these deals, but they make sense and it might be hard to turn them down. Investors have cash to put to work, especially in companies that are relatively low levered; PE firms are looking for ways to extract value in a weak environment for M&A and IPO activity.

Thrift store chain Savers also managed to price at the tight end of talk. Investors took a view that consumers could turn to low-cost shopping options if the economy takes a turn for the worse.

“It was clearly well received,” said the first high yield manager. “It’s not a credit we want to buy but they generate a lot of free cash flow and it should generate a nice IRR for the PE owners.”

Mauser Packaging Solutions is in the market as well this week looking to take advantage of tight spreads. Its sponsor Stone Canyon is looking to refinance secured debt coming due in 2024 and 2025, all while reportedly exploring a possible $8bn sale.

Some buysiders we spoke to had a dim view of the deal, but others liked the structure; today the sellside accelerated the commitment deadline by two days, which gives you an idea of who’s winning that argument.

“Things haven’t played out exactly as the sponsor had hoped,” said the high yield investor. “But they have new senior management in place and they’re making changes. The structure of this deal gives me some comfort they are going to be conservative and position for an exit.”

LogMeOut

Meanwhile, in the secondary market, GoTo Group’s bonds and loans continue to react to emerging details about a security breach at its online password bank LastPass.

The company’s $950m 5.5% SUNs (B1/B-) due 2027 initially fell to the low 40s after a more detailed announcement on Monday; then they rebounded to the low 50s later in the week.

The security concerns now extend beyond LastPass to some of its more commercial products; there’s also the reputational damage to the business owing to the consumer-facing nature of the LastPass product.

“There’s concern around how management has handled speaking to the public,” one stressed debt investor said. “They released updates a month after [the initial breach] happened and were being extremely vague about the extent of the breach.”

Also in software, Finastra lenders are assessing potential recoveries in the event that the company doesn’t manage to address its upcoming maturity wall. Second liens could be in for a haircut, but the silver lining is that earnings are trending up.

Elsewhere this week, private credit funds are spending a lot more time reading the fine print. We detailed one such example from energy data provider Wood Mackenzie where private credit managed to win more protections.

Clients can read our coverage of American Greetings here, which is doing a term loan A&E. It’s a simple situation on the surface, but a bit more intricate when you dig a little deeper — the big question is what the company does about its 2025 bond maturity. If you are not a client but would like to request a copy, please complete your details here.

One last thing: our 9Questions interview with John Wright, head of credit at Bain Capital. Click here to read his takes on everything from private credit to clam chowder.