US LevFin Wrap — Four Seasons tests the limits of repricing fatigue

David Bell
+William Hoffman

26 January 2024•5 min read

There’s been something of a barbell effect in US leveraged finance markets of late.

On the one hand, top-tier names continue to strip basis points from investors’ pockets with loan repricings.

A deal from Four Seasons this week is proving a test of how low investors, particularly CLO managers, may stoop to remain invested in high quality performing credits in what has become the most active market for loan repricings since February 2021, according to JP Morgan research.

Here’s some live footage of investors’ reaction to the repricing wave:

At the other end of the credit spectrum, some riskier names such as Altice USA have been able to borrow at double digit yields — though companies struggling more deeply in distressed territory such as Lumen are restructuring their debt, filing for bankruptcy (Gol) or seeing lender groups form (SI Group).

There’s also a lot in between. This week, deals from the likes of midstream services company NGL and packaging supplier Husky Injection Molding showed how the rally across corporate credit — helped by a deluge of CLO formation — is affording many companies the opportunity to tackle some trickier refinancings that go beyond simple repricing exercises.

“These are not low leverage, simple credits, they all have some issues they have to address,” said one portfolio manager of this week’s dealflow. “That's why you have to be a little more creative with the structure and they're going to have to pay a little bit more.”

For example, several companies that launched deals this week, including infrastructure service provider Artera Services (formerly known as PowerTeam Services), are looking to take advantage of strong investor demand to clean up their cap stacks by taking out expensive junior debt with first lien paper.

The nation’s largest Taco Bell franchisee, Tacala, sought to take out second lien paper with a new $725m first lien TLB that was due to price Thursday night.

The strength of demand from BSL investors is so high that banks have been able to attract refinancing candidates away from private credit firms, including energy consultant Wood Mackenzie.

Slim margins

The lack of supply is proving supportive for bond market technicals, too.

That bodes well for fuel wholesaler Sunoco, which said it would look to refinance high-coupon debt issued by fuel transporter NuStar Energy, which it is acquiring to vertically integrate.

Offshore energy exploration and production company Talos Energy got a warm reception for its $1.25bn dual-tranche bond deal this week, which will fund an acquisition and refinancing. The deal was upsized and priced below talk, well ahead of schedule — thanks in part to an anchor order from Mexican billionaire Carlos Slim.

Strong demand for bonds have brought average double-B spreads down to 238bps, around 26% below their long term non-recessionary average, according to JP Morgan. But sources said that high-rated bond issuers might be happy to wait for even better opportunities to refinance their double-B bonds, which account for the bulk of upcoming maturities.

"The vast majority of companies have access to capital but it’s a matter of price," said Will Smith, director of US high yield at Alliance Bernstein. "CFOs were always in a rush to refinance debt, but they haven’t been this cycle because borrowing costs will be higher.”

The US high yield maturity wall (source: AllianceBernstein)

Of course, not everyone has that luxury. Analysts at Bank of America on Friday identified around $500bn of debt from issuers across HY and BSL that face constrained market access. Though the bank expects only a fraction of this to end up in restructuring, they suggested the market was broadly underestimating this risk.

“We are surprised with the broad market pricing of credit risk at close to cyclical tights at a time when the issue of funding these issuers remains clearly unresolved,” wrote credit strategist Oleg Melentyev.

That being said, loose credit agreements may give struggling companies plenty of ways to dig themselves out of trouble without coming to the debt markets.

“For companies that are struggling and their access to capital is constrained, companies have so far been willing to leverage weak covenants to kick the can down the road,” said Smith at Alliance Bernstein.

LBO flow

Supply has picked up a little on the sponsor side of the market however, with more LBO paper hitting the market this week.

Buysiders are scrutinizing the EBITDA margins in Platinum Equity’s carve-out of generator business Kohler Energy.

General Atlantic tested the strength of demand for travel spending with a loan to fund its investment in Plusgrade, which provides the software to help drive ancillary revenues for airlines and hotels through seat and room auction upgrades.

The debt package for CD&R’s LBO of Shearer’s Foods meanwhile has raised questions over the company’s leverage and growth prospects, now that the buyside has had time to look under the hood.

We also reported on some upcoming financing for Rocket Software, which is working with RBC to prepare around $1bn of secured debt for an acquisition early this year.

There are growing indications that more M&A is on the way to help ease the drought of supply, though processes would need to move quickly to make a dent in H1 numbers.

In the absence of meaningful new money supply, sponsors are also still looking to raise dividends. Blackstone’s banking deposit network company IntraFi launched its second dividend financing in the last two months, and was even able to upsize the new add-on loan by $100m to $300m. Pricing is expected next week.

Finally, we haven’t forgotten about DISH after last week’s drama. As various lender groups form on the sidelines, we explored some hypotheticals — namely, does last week’s aggressive bond exchange lay the foundation for a DIRECTV bid?