US LevFin Wrap — Generation Bridge, Crocs and LifePoint see demand as signs point to active August

Emily Fasold
+Bill Weisbrod
+ 1 more

3 August 2023•6 min read

This week kicked off in a dramatic fashion, with the US getting a credit downgrade for the second time in the nation's history on Tuesday morning when Fitch knocked Uncle Sam from AAA to AA+. The ratings agency cited government deficits, debt, deteriorating governance standards as well as a possible recession later this year.

That move sparked a sell-off in stocks and bonds (particularly in the technology sector), while there was a more muted downturn in leveraged loans. But macroeconomic questions didn’t disrupt the primary market.

Our 9fin loan screener shows that 17 broadly syndicated loan deals have launched since Monday morning, setting the stage for what may be a busier-than-usual August.

While the last month of summer is usually a time where bankers and debt investors can relax, sources we spoke to said the strong market volume could continue into next week, driven at least in part by amend and extend activity.

After all, bankers need to rack up their fees and investors have money to lay out after what has been a relatively slow year up to this point.

Earlier today, a lender call was set for Monday to discuss the long-awaited Tenneco deal. The announcement follows reports earlier this week that the banks who backed the company's acquisition by Apollo last year were finally preparing to offload the $5.4bn in debt that they got stuck with.

“We're expecting there to be a lot of activity next week and I have a feeling August will be even busier than we think,” one portfolio manager said. “It will be mostly A&E deals — if you have 2024 or 2025 maturities lined up, the market needs you.”

To that point, buyers of sub-investment grade debt appear willing to shrug off big-picture issues.

“I think we're going to be busy straight through,” said another portfolio manager. “There's a view that we're moving into recession territory, but the US is in a pretty good spot, and there will be more flexibility for investments.”

Ready to buy

Deals from last week that priced within the last few days also show that investor demand is high, even for credits in troubled sectors.

One example is electric utilities provider Generation Bridge, which upsized and revised price talk on its dividend deal early this morning, despite buysider concerns around the old age of the company's plants and its ability to hang onto capacity pricing as utility prices drop.

The Jefferies-led $865m term loan was upsized from $850m and price talk was tightened to SOFR+425bps with a 99 OID (from initial talk of SOFR+425bps-450bp with a 98 OID).

“Generation's dividend deal felt aggressive, but the market is super hot right now, so anything is possible,” said one source who looked at the deal.

Meanwhile, hospital operator LifePoint Health — which is benefitting from improved staffing conditions in healthcare — illustrated strong demand in the bond market as well.

Like Generation Bridge, the Apollo-backed company also upsized its SSN offering from $600m to $800m and tightened price talk twice, clearing at 9.875% at par from initial talk of 10%-10.250%.

Crocs, the notoriously “hate-loved” footwear retailer, was yet another winner in the primary market this week. After hitting record high revenues in the second quarter, the NASDAQ-listed company priced its $1.18m term loan repricing at par and shaved 50bps off the facility's margin.

Elsewhere, sources we spoke to about Veritext (which one dubbed “the Uber of court reporting”) were worried about the stability of the company's earnings as well as the impact AI and transcription tools could have on its business model in the long term.

Nevertheless, the company saw strong enough demand for the loan portion of its refinancing effort that it was able to upsize the tranche from $720m to $940m, which priced at the tight end of talk.

Market conditions also portend a path for travel companies such as cruise operators and airlines to refinance some expensive debt they issued to get them through their darkest days of the pandemic. This week, Carnival may have shown how that’s done.

Pain points

Of course, not everything is sailing through quite as easily.

Commitments were due yesterday for a $375m term loan to fund terminal gaming company J&J Ventures' planned acquisition of Golden Entertainment, although the facility (which is talked at SOFR+400bps with a 75bps floor and a 97-97.5 OID) has yet to close.

As we reported earlier this week, Deutsche Bank is moving ahead with syndication to take advantage of tightening spreads, even though the acquisition is still months from closing and the final purchase price could still be adjusted.

The uncertainty around final terms means the funds need to be placed in an escrow account, and J&J will face ticking fees if it doesn't complete the deal in a timely manner.

In anticipation of trickier situations hitting the primary market in the coming months, we took a look at the current playbook for refinancing lower rated, privately-owned credits (hint: best to have a deep-pocketed sponsor).

The rising tension between screenwriters' unions and content studios is also expected to place pressure on levered borrowers in the space. (We flagged Creative Artists Agency and content platform Lionsgate as just a couple of many credits that could be impacted by the standoff).

In secondary trading, portable toilet rental provider United Site Services saw quotes on its $550m 8% SSNs due 2029 drop sharply from 63.13 on 27 July to just 55.28 on Tuesday before bouncing back to 56.60 on news that both its CEO and CFO had resigned.

M&A will have its day?

And last, but certainly not least, this week showed signs that M&A activity may be percolating, providing debt investment opportunities for various lenders (especially for Blue Owl, it seems).

On Monday, we reported that Blue Owl is leading an approximately $2bn term loan to finance TPG and Francisco Partners' $6.5bn take-private acquisition of software company New Relic.

According to our reporting the direct lender is also leading a debt package that consists of a $700m term loan and $100m revolver for Kohlberg & Company's planned acquisition of pharmaceutical research provider Worldwide Clinical Trials.

Late last week, we also reported that Wingstop restaurant franchisee Far West Services had reached an approximately $450m acquisition agreement with Brentwood Associates, which will lever the company at roughly 4.25x.

In a much larger restaurant deal that could be one of the biggest buyouts in the foreseeable future, Subway is forging ahead with its sale. But bidder Advent International is reportedly no longer interested.

And in our private credit round up The Unicrunch published earlier this week, sources said that many funds are feeling more optimistic following a period where many retreated or offered lower tickets to diversify their portfolios due to macro volatility. They noted that “the financing capabilities of private credit are so deep that a $10bn unitranche is doable.”

There’s certainly dry powder out there, and more to come — sources said KKR is looking to raise $5bn for its latest mezzanine debt fund to tap into demand for junior capital.