And yet, in today’s volatile markets, it does sometimes seem like luck is a big factor. There are lots of crossed fingers out there right now — not least among Citrix’s bankers, who will be hoping the market holds as they begin work to offload the company’s LBO debt

Lady luck ain’t on my side

Rather poetically, another example of today’s chance-driven primary market is 888 Holdings, the Gibraltar-headquartered online betting and gaming company that has been in the markets since late June to finance its acquisition of UK bookmaker William Hill.

Investor feedback during European premarketing efforts was not hugely promising (partly because of an upcoming regulatory review that could impact the business) and the company’s lead bankers at Morgan Stanley and JP Morgan added a US dollar tranche to round out the deal.

They launched it into syndication barely a week before the Independence Day holiday weekend, at an OID of 92-93. Given where a handful of deals — Creative Artists Agency, Vertex Aerospace, Dave & Buster’s — had just priced, that didn’t seem egregiously high at the time.

But the timeline was tight, the market continued selling off, and unsurprisingly, the leads had to push syndication back a week. Final pricing eventually emerged this week, at SOFR+CSA+525bps (unchanged from launch) with a whopping 85 OID.

The back-of-the-envelope math on that looks pretty painful for the underwriters. Ultimately, they appear to have shifted the debt, so in one sense, all’s well that ends well. But it cost them dearly — the gambling industry is a risky business, and this bet did not pay off.

Underwriters can’t predict the future. In that sense, they may have been a victim of bad luck: this deal was underwritten in September 2021, way before markets fell out of bed (although it was renegotiated in April, by which point news had broken about new UK gambling rules).

“[New regulation] is always a risk with gambling companies, but there seems to be with this deal some certainty that the company will be affected in the next couple of years,” said a CLO manager. “In a market that is as difficult as it is, what’s the appropriate price for that risk?”

But regulation wasn’t the only thing that made this deal a tricky endeavor. For one thing, gambling is a hot-button issue for ESG, which is becoming more and more of a factor for debt investors; also, the sterling market (where part of the deal was funded) is often unreliable.

How do you put a price on those risks without taking a bit of a chance?

I got the wandering eye

Ah, the temptation to stray — one of the most universal and yet also most widely disdained human emotions.

Thankfully, many CLO managers are progressive enough to have negotiated an open relationship with their main squeeze, by way of the bond bucket. As the selloff pushes bonds lower and lower in secondary, they’re not afraid of using it.

We covered the trend this week, citing analysis from analysts at Bank of America. As we discuss in the story, in current market conditions the bond bucket offers an enticing way to build par, and provide diversification both within individual capital stacks and across the market as a whole.

This gambit is not without its risks, though. Some bond buckets allow managers to hold unsecured bonds as well as secured, which could lead to lower recovery values (although this shouldn’t be a surprise for CLO tranche investors, as these rules are codified into the notes).

The bond market also moves at a much faster pace than loans, with significantly shorter settlement times. As one source speaking with 9fin put it, loan managers with less bond market experience risk “getting their butts kicked” in this unfamiliar territory.

The big risk of the bond-bucket trade, however, is the timing: the aim is to build par by riding the rebound, but when does that rebound happen? To be sure, it doesn’t seem unfairly optimistic to believe that bonds are due a big rebound. Today’s job numbers offer some basis for that.

“To have defaults come in higher than what is priced in to the market, you would have to have the worst five-year period of defaults since 1970,” said Ken Leech, CIO at Western Asset Management. “Think about the pessimism that’s implicit in that kind of price scenario.”

Then again, rational expectations have been confounded many times this year, so it can’t hurt to ever so slightly cross your digits.

Bad eggs

News emerged last week about a Florida ice cream maker that was recalling product over an outbreak of listeria, the potentially deadly bacteria.

A few days later, Goldman Sachs and JP Morgan launched a new high yield bond issue for Neogen, which makes test kits to detect dangerous substances in food.

We’re not suggesting this is anything other than a coincidence, but the listeria news is probably bullish for food testing companies (incidentally, middle-market borrower Van Leeuwen Ice Cream issued a recall this year after failing to declare nuts in some recipes).

Anyway…Neogen ended up pricing $350m of eight-year senior unsecured bonds at 8.625%, to help finance the its acquisition of 3M’s food safety business.

By today’s standards, this was a fairly unremarkable syndication. The notes were placed at par, and although the deal priced wide of the average yield for its B2/BB rating, Neogen’s credit profile is stronger than some we’ve seen recently (read our Credit QuickTake which clients can read  here. If you are not a client but would like to read a copy, please complete your details here).

In the loan market, Apex Group is raising $320m to support its acquisition of Maitland International Holdings and MMC Group. The deal was upsized today from its original target of $300m — it’s talked at an OID of 92-93, with a coupon of S+CSA+500bps.

Backed by TA Associates, Apex provides fund services to the asset management industry. It’s a serial acquirer, with recent deals including its £1.5bn acquisition of Sanne last October and Apex Profilir in September.

Other stuff

Is $6bn enough to get Coinbase through crypto winter? (9fin)

SoftBank’s market maven Misra steps back (WSJ)

How swearing can make you happier (The Atlantic)

Benny Hill soundtracks coverage of Boris Johnson’s ouster (Twitter)

Netflix doesn’t want to hear it anymore (The Verge)

Elon Musk had twins with an employee last year (Insider)

Shinzo Abe, 1954-2022 (FT)