US LevFin Wrap — Cornerstone, Cardenas and primary paradigms, Twitter execs and pink slips

Will Caiger-Smith

14 July 2022•6 min read

Another month, another awful inflation print, and another recalibration of the Fed’s rate-hike trajectory. When does it end? Probably not any time soon — and that’s likely one of the reasons we saw a flurry of new debt syndications this week.

The current slate of new deals — including LBO debt from Cornerstone Building Brands and Hispanic Food as well as an acquisition financing from TekniPlex and a refi from Atlantic Aviation — is more activity than the market has been used to in recent weeks.

More supply is set to hit the table soon. As attentive 9fin readers will know, bankers began working to offload Citrix’s buyout debt just after the July 4 holiday weekend. They’re also offering early looks on the debt backing Apollo’s acquisition of Tenneco.

Underwriters have been under pressure to offload this risk for some time, and downbeat earnings from JP Morgan and Morgan Stanley on Thursday will have done little to ease that. Likewise for the Fed’s announcement that it was considering a 100bps rate hike after the 9.1% inflation print.

We do not envy syndicate bankers in this environment. Offloading risk is a demanding job at the best of times, but with the market gyrating every time new data comes out (strong employment numbers offered some relief before CPI killed the vibe yet again) it just keeps getting harder.

Still, right now it seems like the market is somewhat open. Today we even had an example of pricing flexing tighter in a primary deal — lead arranger Jefferies has set the final OID for Atlantic Aviation’s refi loan at 94, from initial talk of 92-93.

That’s encouraging. And if nothing else, at least the deals that launched this week will provide some kind of reference point, even if the market falls out of bed again over the next couple of weeks.

“I think right now, you might have a little bit of a window, but it feels like the next move is still lower,” said Dan DeYoung, a high yield portfolio manager at Columbia Threadneedle. “There's just too much uncertainty.”

It’s complicated

With that in mind, it’ll be interesting to see where pricing shakes out for the term loan backing Apollo’s new specialty grocery creation, Hispanic Food. Will it hold steady at the generous initial talk of SOFR+ 700bps with a 92 OID, or go wider? Could it maybe even…flex tighter?

The business outlook is complicated. As we wrote yesterday, on some levels the deal (a combination of Tony’s Fresh Market and Cardenas Markets) is a smart play: the chains cater to North America’s fast-growing Hispanic population, which is spreading across the country.

But the group’s locations are clustered around the midwest and south-west, a level of geographic concentration that put some buysiders off. Larger competitors could easily begin stocking similar specialty products, inflation is squeezing margins, and a recession could change consumer habits.

Still: in an economic downturn, investors sometimes see the grocery sector as a safe haven. The same can’t be said for housing, or the auto industry — and two other syndications (Cornerstone and Tenneco) are set to test that paradigm.

Cornerstone’s buyout by CD&R comes at a precarious time for the building products company, which is facing a decline in home improvement projects and lingering supply chain issues, as well as an increasingly challenging credit market.

Tenneco’s deal is entering syndication as the car market comes off a hot stretch. Its aftermarket parts division could be a boon if people opt to repair existing cars rather than paying up for a used one, but its legacy exhaust business may be behind the times as electrification takes hold.

The direction of each company may depend on bigger forces: recent forecasts from Goldman analysts call for home prices to continue rising, but for the bubble in car valuations to burst.

Macro predictions aside, both of these companies are already well known among leveraged credit investors. As such, it’s worth paying attention to where they shake out — they both present an opportunity for well-informed and efficient price discovery.

Delete your account

Before we dive into the Twitter debacle, let’s take a moment to reflect on all the people (especially lawyers and journalists) whose weekends were ruined by Elon Musk. We at 9fin were glad to have published our weekly wrap by lunchtime, before the news broke.

On a more serious note, this is obviously going to be a huge case with a lot of public attention. So we’re glad our peers at Bloomberg took the time to explain why some bankers will be relieved if the deal gets pulled — an angle that less specialized outlets might have missed.

That outcome doesn’t look likely, however. As much of a maverick as Musk is, he’s picking this fight in one of the world’s foremost courts for corporate disputes. It’s hard to see what kind of galaxy-brain argument he and his lawyers could dream up to win over the Delaware deities.

Anyway, speaking of galaxy-brain theories, an interesting one occurred to us when discussing Twitter: are there any other examples of executives bringing a lawsuit to get themselves fired?

If Twitter is successful in forcing Musk to go through with the acquisition, the company’s top brass will have won the fight of their lives and secured a chunky payout for themselves and other significant shareholders. But surely Musk won’t want to keep them around…?!

Who knows. Maybe he’s doing it to test their mettle, like some kind of epic corporate hazing ritual. Maybe they would quit of their own accord, which would be a perfectly reasonable decision for a whole bunch of reasons.

But maybe they also really care about the company and would want to stay on, in which case they might be writing their own pink slips by backing this case.

This is basically all theoretical — ultimately, Twitter’s directors have a fiduciary duty to shareholders, and so had little choice but to fight for this deal. Still, running through this potential chain of events is a fun reminder of how weird this whole situation has become.