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Private Credit 

David Bell

William Hoffman

Welcome back! There were signs of life in US levfin markets this week, though it was not the rip-roaring start to the primary market seen in investment grade credit.

A $2.75bn bond deal from Ford on Tuesday reopened the high yield market for 2023 (more on that later). It followed the second quietest December for new issue HY bond supply in the past four years, with just $2.3bn raised during the month, according to JPMorgan research.

But stay tuned for a broader pickup in activity. Bankers have been working behind the scenes on both public and private new offerings, especially with the credit market’s overall positive reaction to economic data this week.

“We’ve had a bunch of conversations in recent days and anticipate putting [private] deals into the market in the next two weeks,” said Michael Moore, a managing director in capital markets at tech-focused investment bank Union Square Advisors. “We’d like to see a few institutional deals step forward into the calendar but we’re anticipating that will start to happen from next week.”

Top of mind in terms of the new issue calendar are the hung LBOs from 2022 that banks are still looking to clear from their books.

We reported on Thursday that UBS has been laying the groundwork for the sale of first lien term loan debt that backed Clayton Dubilier & Rice’s $2.6bn acquisition of Roper Technologies’ industrials unit, which closed in November last year.

In addition, banks have been gauging the appetite of investors to support bond refinancing activity for some riskier names with 2024 maturities, buyside sources said.

Here’s a snapshot of some of the largest 2024 USD maturities from companies rated Triple C or below, using 9fin’s bond screener tool — clients can click here for the full list:

Bond screener showing Triple C rated 2024 maturities (via 9fin)

As we wrote last year, there’s not a huge amount of debt falling due in the next couple of years thanks to the massive volumes of refinancing activity in 2020 and 2021 when rates and credit spreads were at rock bottom.

But anything that’s still left is unlikely to be straightforward, especially in this environment.

“It’s not just a question of finding an easy price for some of these … the short stuff that was easy has already been done,” said one portfolio manager. “You’ve got to make sure the structure and pricing makes sense. We’re probably a little more cautious than the market at this point as it’s not really pricing in any downside scenario.”

On the loan side, sources said they’re expecting more amend and extend deals.

“Anyone with debt coming current that hasn’t refinanced, they’re doing more A&E as opposed to full refi,” said a leveraged finance lawyer. “The OID and interest and up-front fees for say three years is better than going out five plus years.”

And as more companies belatedly switch their LIBOR loans to SOFR, investors are expecting more tricky negotiations over credit spread adjustments being offered, as we reported towards the end of last year.

Sources in the private credit landscape expect that corner of the credit market to continue to play a bigger role in the leveraged finance landscape, as publicly syndicated markets tackle a range of macro and technical pressures.

But expect to see an increased diversification in lending strategies beyond regular corporate direct lending, they said.

“Direct lending is a great way of entering into private credit but it’s also highly correlated to the health of the US economy,” said Jess Larsen, founder and CEO of Briarcliffe Credit Partners, a private credit placement agency.

“If we’re in an economic slowdown or recession environment LPs are looking at other strategies, such as NAV lending, revolvers, distressed or specialty finance. They’re looking for more uncorrelated strategies that give them diversification and protection in a downside environment,” he said.

This trend was already kind of playing out in the LBO market at the end of last year.

The buyout financing for satellite imaging company Maxar Technologies and business spend management company Coupa Software in December both went to private credit, but the large number of lenders taking smaller ticket sizes pointed to some degree of cooling.

“Those were phenomenal prints that show the market is resilient and can still print risk,” said Moore at Union Square, “but 12 to 18 months ago they could have gotten those done with much fewer players. Lenders are writing smaller tickets but they’re still active.”

The private debt buyside is also bracing for more bruising encounters with sponsor-backed companies trying to avoid sharp increases in their cost of debt because of MFN clauses. Here’s one example from last year at Integrity Marketing that we covered in more detail.

“We’ve done a tremendous amount of work for sponsor clients on how to avoid MFN pricing increases,” said the lawyer. “It’s something that’s top of mind for them.”

Let’s turn back to US auto maker Ford Motor Co., which returned to the market this week continuing a pattern of near quarterly issuance in the capital markets.

The Baa2/BB+/BB+ rated auto maker was a good high-quality name to restart the high yield market in the new year investors said, but they noted that it’s somewhat singular in an otherwise dormant high yield primary landscape.

“It’s very quiet and I think Ford was an anomaly,” one high yield analyst said. “I do think we could see the HY window open in a few weeks but on a very selective basis.”

Issuing out of the lending company, Ford Motor Credit raised $2.75bn across three tranches, one of which was a rare $300m senior unsecured floating rate bond due 2026 that priced at SOFR + 295bps.

Carefully navigating the January market (via Ford)

It was the first opportunity for investors to gain floating rate bond exposure in the US high yield space in at least a year as issuers and borrowers alike have relied on the loan market for floating rate exposure.

“For Ford it’s a good asset-liability match,” said John McClain, a high yield portfolio manager at Brandywine Global. “It didn't price with enough concession for us and at just $300m in size you’ve got to get paid for the lack of liquidity.”

The two other tranches were fixed SUNs that quickly tightened by some 37bp-42bp through a quick drive-by syndication on Tuesday. Ford priced $1.3bn 6.95% SUNs due 2026 at 99.87 and $1.15bn 7.35% SUNs due 2030 at 99.88.

Despite the strong price progression, Ford is not immune from the effects of rising rates. The new fixed-rate notes represent the highest-cost bonds in its debt stack.

By comparison, the new 2030s are 445bps wide of where Ford priced similar 2029s this time last year at 2.9% (currently trading at a yield to maturity of around 6.9%)

The three-part deal likely benefitted from some crossover high-grade investors looking for some extra yield from a name they expect could get upgraded to investment grade in the not-too-distant future, one HY portfolio manager said.

While new vehicle sales in the new year are expected to be up slightly over 2022 levels, rising rates, low inventories and a possible recession will keep sales relatively muted on a historical basis and could delay an upgrade out of high yield. In fact, Ford’s latest 2022 sales were down despite some bright spots in EVs and a late surge for pickup trucks.

“It's just a more challenging economic environment and that’s the sort of thing that can sometimes make rating agencies hesitant to upgrade names like Ford,” the portfolio manager said. “It'll happen at some point, it's just a matter of timing.”

Party City plans bankruptcy filing within weeks to cut debt (WSJ)

Auto industry expected to post worst US sales year in more than a decade (WSJ)

Americans can’t stop pampering their pets — companies want in (WSJ)

Coinbase reaches $100m settlement with New York regulators (New York Times)

CES 2023: all the news from the year’s biggest tech conference (The Verge)

CFPB and New York Attorney General sue Credit Acceptance (CFPB)

US regulator moves against Ardagh over non-compete restrictions (The Irish Times)

Wharton’s majoring in woke capitalism. Some are taking an elective in dissent (RealClear Investigations)

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