US LevFin Wrap — Credit is a dating game, HY energy turns to growth, CLOs are like roaches

Emily Fasold
+Sasha Padbidri
+ 1 more

20 April 2023•6 min read

Sometimes the new-issue market can feel like a high-stakes dating game — a bit like Netflix’s ‘Love is Blind,’ which fumbled its live reunion show event this week.

Like a rushed wedding proposal, new deals can come with a lot of risks. And as the market recovers, companies are increasingly pushing the boundaries of what investors will approve.

Take Kedrion, for example. This week we dug into the add-backs that the company’s bankers used to help offload the debt backing its buyout deal. Elsewhere, investors are scrutinizing a chunky refi for Internet Brands and a new deal for ship repair business Titan.

Likewise, loan investors are questioning how Talen Energy will be run as it seeks funding for its exit from bankruptcy.

“In the past, they’ve had high leverage and a sponsor that ran it way too aggressively,” said one buysider of the power producer. The new owners — unsecured bondholders including Nuveen Asset Management, Rubric Capital Management and Citadel — have a lot to prove.

As interesting as these deals may be, the market is not yet fully embracing the riskiest credits. According to 9fin data, only a handful of triple-C bond deals have priced this year and no triple-C loan deals have been issued.

For some investors, there are still just too many unknowns in terms of the economic outlook to be comfortable adding risk more aggressively. As the contestants on ‘Love is Blind’ know well, nobody wants to open up just to get their hearts broken.

“Is it going to be a shallow recession? Will it be deep? Is it not going to happen at all? There's just this uncertainty that is hanging over the market,” said a credit portfolio manager.

“A lot of folks are just kind of sitting on their hands waiting to see some data that will allow us to conclude one way or the other, whether we're out of the woods or if this is going to be a little choppier going into the summer.”

Further adjustments

The Morgan Stanley-led bank group that held Kedrion’s hung debt — underwritten last year — finally managed to syndicate it to investors this week. They placed $790m of 6.5% SSNs due 2029, at a heavily discounted OID of 84 to yield 9.966%.

The deal ultimately cleared in line with price talk, but some investors were wary of the aggressive add-backs used to juice EBITDA. The notes were marketed off of €266m of pro forma run rate adjusted EBITDA — a big jump from the €97m pre-adjusted figure, according to filings.

Those add-backs included everything from one-off legal costs to residual impacts from the pandemic that the company says will not continue in future periods. For more on this deal, check out 9fin’s credit, legal and ESG QuickTake reports (if you are not a 9fin client, you can request the QuickTakes package here).

Similarly, investors and rating agencies have voiced concerns about Internet Brands’ future performance, as it markets one of the largest deals to hit the loan market in some time.

The $4.741bn TLB is talked at S+425bps at an OID of 97.5 and appears to have a good number of backers at that price. But some buysiders are nervous about low interest coverage, while others worry that a weakening economy could lead clients to pull advertising from the company’s websites including WebMD and CarsDirect Connect.

Elsewhere in the market, healthcare laundry services company ImageFIRST and healthcare tech company Signant Health are out with loan deals.

It's somewhat of a surprise to see those two credits in the publicly syndicated market, as health and tech companies are frequent favorites of private credit firms. The private credit market has a real taste for these two sectors, as we detailed this week.

Other borrowers, such as ship repair business Titan, were actively considering private credit deals but then changed tack to the syndicated market. Titan is out with a $675m seven-year TLB talked at S+475bps and an OID of 97-98, with commitments due late next week.

Energizer bunnies

Energy companies continue to be ultra-popular among investors.

The latest company to ride this wave of positive momentum is power producer Talen Energy, which is emerging from bankruptcy after getting caught offside when natural gas prices blew up last year.

The company had a rough few years, but is expected to emerge as a more focused and ESG-friendly natural gas player. It also has high ratings of Ba3/BB/BB+ on its $825m TLB and $545m TLC.

Fracking services company ProFrac could be the next to shoot its shot, as bankers reach out to investors to gauge interest in a potential new debt offering. If a deal comes, it would be ProFrac’s second of the year after it raised a $170m TLB due 2025 back in February.

We also detailed a debate brewing among Enviva investors about the wood pellet maker’s heavy spending, as it builds new plants and continues to pay big shareholder dividends.

The troubles come amid a blazing debate about whether biomass electricity counts as renewable energy; the EU recently reaffirmed its policy position that it does, but Enviva’s intense cash burn is a more immediate concern for investors.

Meanwhile, more established oil and gas companies are looking at M&A and reducing oil-price hedges, in a sign that they’re getting more aggressive in chasing growth. We highlighted three trends in the energy space this week that demonstrate renewed confidence in the market.

Lean mean CLO machine

Also this week, 9fin headed to IMN’s CLO conference in New York, where CLO veteran Paul Travers of Sycamore Tree Capital Partners called the asset class a “financial cockroach”.

The comparison may be unflattering, but Travers has a point — the CLO market has evolved many times in order to survive. Some of the latest developments include CLO ETFs, and the potential for faster growth in middle-market CLOs.

Conference delegates also hyped ESG as an opportunity to further grow the CLO investor base. Earlier this month, we reported on the debut of ‘article 8’ CLOs in Europe, a model which could pave the way for similar ESG-centric deals here in the US.

“Managers are starting to implement internal policies and frameworks,” said Diana Li, a manager at PwC’s financial markets and real estate practice. “It all starts with the integration of ESG scorecards [and] exclusionary lists … into daily deal processes, from deal drafting to deal close.”

But not all developments in the CLO market have been positive. Specifically, an upcoming court decision on whether syndicated term loans should be classified as securities could potentially shake up the leveraged loan and CLO markets in a big way.

“It’s hard to understate how big of an impact this would have,” said Joshua Koppel, an associate at Allen & Overy’s structured finance practice. “Catastrophic is an inadequate word.”

“It’ll affect everything from existing deals to origination documents. I’m sure banks are concerned if suddenly a portion of their balance sheet turned out to be something else. What would they even do to solve that?”

Before you log off for the weekend, check out this fun read on how bond issuers are name-dropping ChatGPT in offering documents. And if you’re into European restructuring, be sure to sign up for our London team’s webinar: ‘Groupe Casino — Gambling with the capital structure’.