US LevFin Wrap — Carnival returns, loan market thaws, Vericast tweaks terms

David Bell
+William Hoffman
+ 2 more

20 October 2022•5 min read

If you were in Miami this week, you might have seen several thousand structured finance conference attendees hanging out in South Beach, or Carnival’s cruise ships docked at the Port of Miami.

The cruise line’s treasury team, meanwhile, sailed into the debt markets earlier this week to write another chapter in the company’s post-pandemic balance sheet playbook.

Carnival’s new $2bn bond offering struck a balance between the company’s need to borrow at a somewhat reasonable level, and the restrictions of its capital structure and obligations to existing secured bondholders.

The solution, explained in greater detail by 9fin’s legal analysts for clients here, was to give the unsecured bonds structural seniority via a new SPV issuer that will own 12 of the company’s newest and most efficient ships. (If you are not a client but would like to request the full Carnival report package, you can do so here.)

The benefits were clear — at 10.75%, the yield on the new bonds certainly delivered Carnival savings compared with where its unsecured notes are trading (around 16%).

But buyers still feel they are able to drive a good bargain in this climate as they grapple with both fundamental and technical headwinds.

“Not only were investors doing the fundamental work, but they were also looking at the technicals and liquidity, which probably don't get better between now and year-end,” said one portfolio manager. “So regardless of what your views are on fundamentals and in valuations, investors, probably, at this stage in the calendar year, want to be compensated for liquidity on top of that.”

Opening up

Still, it was another sign that capital markets appeared to be thawing somewhat for larger, better-rated names.

There were also signs of this in the leveraged loan market this week, with web hosting company GoDaddy (rated Ba2/BB) looking to term out its existing $1.77bn 2024 TLB with a new seven-year TLB of the same size, and UK-based gaming company Entain (Ba1/BB/BB) pricing a $1bn seven-year TLB to fund the acquisition of SuperSport.

“It’s just a different animal to a B2/B3 deal,” said one leveraged finance banker, speaking to the success of Double B credits accessing the market. “The CLO machine is disrupted, and if you’re trying to syndicate B3 or B- risk into the term loan market, everyone is worried those deals will be CCC soon.”

One currently Double B name with major potential financing requirements in the coming weeks is, of course, Twitter — where banks are still on the hook for the $12.5bn debt commitment backing the deal.

That deal has still not closed though, and it remains to be seen whether banks would try and syndicate the company’s debt or hold it, as we saw with Brightspeed (if you are a not a client you can request a copy of this report here) and Nielsen.

Bloomberg’s report yesterday that the Biden administration is considering a national security review of Elon Musk’s ventures is unlikely to help clarify the situation. Twitter’s staff, in the meantime, are bracing for the possibility of drastic job cuts, as reported by The Washington Post.

Welcome to Miami

Almost 4,000 structured finance professionals descended on the Fontainebleau Hotel on South Beach Miami this week for the annual ABS East conference.

A good portion of the crowd was comprised of leveraged loan and CLO participants, who said that rising defaults and earnings shocks were top of mind.

“Rates are definitely impacting free cash flow,” said Roberta Goss, senior managing director at Pretium Partners, on a panel discussing the leveraged loan market.

”There are definitely some things we will have to navigate over the next couple of years, and inflation and rates are two of those factors. But we feel like we’re getting to a point where we’re being paid for some of that risk,” she said.

After some Credit Suisse-sponsored festivities at LIV on Monday night, day two of the conference included discussion about how the CLO market will manage worsening credit metrics among loan issuers — and why millennial and Gen-Z consumers are to blame for deteriorating consumer credit performance.

For more insight on these market and macro trends, take a peek at our 9Questions interview with Lauren Basmadjian, co-head of liquid credit and head of US loans & structured credit in The Carlyle Group.

Swap shop

It’s no surprise given the worsening economic environment that companies are pursuing debt exchanges in order to get more breathing room.

This week, after lender pushback, Vericast adjusted the terms of its plan to exchange up to $350m of an existing $1.1bn term loan due 2026 into new 12.5% second lien notes due December 2027 with remaining lenders granting the company an amortization payment holiday.

Likewise, Bed Bath & Beyond announced exchange offers for its outstanding unsecured notes due 2024, 2034, and 2044. S&P wrote this week that the deal is tantamount to default because noteholders will receive less than they were originally promised.

The most pressing notes are the $300m 3.749% 2024s that dropped to as low as 25 cents on the dollar this week for a yield to maturity of 104%.

As earnings diminish, the company is giving investors the opportunity to get into new 3.693% senior second-lien secured non-convertible notes due 2027 and/or new 8.821% senior second lien secured convertible notes due 2027.

Sue Gove, director and interim CEO of Bed Bath & Beyond said in a press release: "We believe this transaction will put us in a stronger financial position going forward by significantly reducing our debt and interest expense upon a successful completion.”