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Investors are showing plenty of demand for new paper — after all, even though the loan and bond primary pipelines have picked up, it’s not that busy by historic standards.
“The loan market feels really busy but if you think back to before Russia invaded Ukraine (last February) it’s definitely a lot lighter than it was,” said a capital markets banker. “The bond market feels robust too but it’s still well below where it was before the conflict started.”
As dreary as the markets were last month, conditions could still get worse, as we saw in the latter half of 2022 when the new-issue stream was essentially frozen thanks in part to geopolitical and macroeconomic tumult. So companies are raising debt now in case the skies darken further.
“With headline noise and rate volatility you definitely have a lot of boardrooms and C-suites taking the view that while the coupon they wanted six months to a year ago may not be there, things can get worse before they get better,” the banker said. “They’re being proactive dealing with maturities now while the cash is out there.”
Circus act
One indicator that current conditions are significantly better than last year’s is the return of loan repricings, which allow borrowers to bring down their cost of capital.
Two years removed from bankruptcy, Canadian circus operator Cirque du Soleil raised a $550m TLB to refinance its exit term loans. That loan priced at the tighter end of price talk, in spite of concerns related to the company’s capex needs and possible changing consumer tastes.
A fine balance (via Wikimedia)
Elsewhere, broker-dealer network Cetera Financial Group isdangling a juicy spread to buysiders as it shops its $750m acquisition add on loan (commitments are due 8 March).
Rising rates are boosting Cetera’s earnings, but some buysiders wondered what might happen once the Fed starts loosening — and what the implications might be for the credit profile. We discussed that deal in more detail on this week’s Cloud 9fin podcast.
In lieu of realizing gains through exits, sponsors are taking advantage of market demand to raise dividend recaps, with Carlyle and GIC-owned specialty chemicals company Nouryonbeing the latest to do so. The Dutch company came with a $750m TLB that raised leverage by nearly half a turn.
And looking ahead, commercial mortgage-lending REIT Claros Mortgage Trust is sounding out investors about an add-on to its existing TLB, to finance a potential acquisition.
Bonds break out
After a couple of no-deal weeks in the US high yield primary, a handful of well-received deals helped reopen the market this week.
“Generally, it’s quality,” a buyside analyst said. “You’re not seeing risky stuff hit the market.”
The largest issuer on the week was pharmaceuticals company Teva with a $2.49bn-equivalent sustainability-linked bond package split between USD and EUR notes (see all of Teva’s debt instruments).
Investors warmed to the credit after Teva was able to settle thousands of lawsuits in 48 states over claims against the company’s marketing of opioid painkillers. For more on that situation read our Credit QuickTake and ESG QuickTake.
Construction equipment auction company Ritchie Bros made its pitch to move into the car auction business with a $1.35bn bond package to fund its acquisition of IAA —one of the few M&A financing deals in the pipeline.
The coupon tightened through price progression in an endorsement of that plan, though the merger is still facing substantial pushback from shareholders ahead of a 14 March vote. For more details on the financials, see our Credit QuickTake.
However, interest rates continue to work against the bond pipeline — the yield on 10-year US Treasuries exceeded 4% this week for the first time since November 2022.
“For the 10-year bond, which a lot of people look at, 3.5% is more of a feel-good spot,” a sponsor coverage banker said.
Another week, another set of headlines about direct lenders muscling in on LBO financings.
This trend is not exactly news, but some of the names that are getting involved in it are definitely newsworthy; this week it was the turn of Oaktree, which is looking to raise a $10bn fund to finance private equity buyouts.
According to this report from the FT, Howard Marks and Tony Harrington wrote to clients that some earlier entrants to the private credit space are writing smaller checks lately (we covered that trend last year) and then said what many others are thinking: there’s a chance that some of these lenders got over their skis in recent years.
“While the need for this type of lending is enormous, we believe the competition to lend is limited,” they wrote. “Moreover, we believe many are facing legacy portfolio issues because they aggressively deployed capital in sponsor-backed loans between 2019 and 2021, a period when heightened competition caused financing for leveraged buyouts to become increasingly borrower friendly, to the detriment of lenders.”
Meanwhile, in what is likely the biggest LBO in process at the moment, a group of private credit funds is working on a $5.5bn financing for Carlyle’s buyout of healthcare tech company Cotiviti according to various news reports.
This week Bloomberg reported that prospective lenders are offering a PIK component to the deal, a risk-on move that would potentially limit cash interest paid by the company, but could balloon its overall debt burden.
Given the relative dearth of new buyouts, it remains to be seen if that deal is indicative of the future of leveraged finance or an outlier in a still tight market.
“Hold sizes are down from where they were but creeping back up,” one direct lender said. “The smaller deals are easier to finance. The bigger ones are still hard to pull together.”
The Charlesbank Capital-backed company’s debt was already under pressure after both Moody’s and S&P revised their outlooks to negative last June, citing cash flow problems.
And TV company operator Tegnasaw its 5% senior notes due 2029 also fall over 7 points thanks to the US FCC’s decision to review a planned buyout of that company by Standard General over consumer pricing concerns.
For its part, Standard General said on Monday that it planned to forge ahead with the deal.
This article was originally published for 9fin subscribers. 9fin is designed to offer the most comprehensive and easy to use source of data and analysis on the leveraged finance markets. Within the platform you can search across 9fin and third party news, direct links to source documents and filter quickly across instruments and companies. If you would like more information about any of the links within this article or to see more of 9fin's functionality please get in touch.
