US LevFin Wrap — Intertape, Entegris, Kofax offer steep discounts to clear paper

William Hoffman
+Emily Fasold
+ 1 more

16 June 2022•7 min read

It was a bloodbath across financial markets this week, and Intertape Polymer, Entegris and Kofax found themselves in the thick of it as banks cleared their leveraged buyout and acquisition financing.

All three borrowers saw their deals priced at steep discounts, underscoring the reality facing banks as they try to offload underwritten financing when inflation and recession concerns are ripping through rates and credit markets.

Many traders and investors compared trading activity this week to some of the worst days of March 2020, at the peak of pandemic-driven volatility.

With stocks firmly in bear market territory, investors pulled $5.7bn from high yield funds in the week ended June 15 — the biggest weekly outflow since February 2018 — while loan funds saw $2.031bn outflows, the largest since March 2020, according to Lipper data.

The average yield on ICE BofA’s HY index jumped to 8.5% as of June 16, almost a point higher than last Thursday.

“It’s been quite a move in the high yield market — nothing short of one for the record books,” one bond trader said.

Against this backdrop it was no surprise to see the pricing widen on the Intertape deal, which will help fund Clearlake Capital’s acquisition of the paper and plastic packaging company.

The riskier piece of the debt package, a $400m SUN due 2028 (rated Caa2/CCC+) cleared the market at a 10% coupon, with an OID of 82 to yield 14.361% (the notes were capped at 10% when the deal was underwritten as 9fin previously wrote here). Initial talk had started in the high 11% to 12% yield range.

The bonds ended up pricing close to average triple C yields, which peaked above 14% this week having moved some 147bps wider during the deal’s two-week marketing period.

The OID on the $1.5bn six-year loan (rated B2/B) meanwhile widened to 92, from guidance of 93-94, with the spread set at S+CSA+475bps.

While some investors were constructive on the business, there were also concerns that a recession could cut into demand for online retail sales and Intertape’s packaging products. The company sells to large retailers such as Amazon and Walmart.

Additionally, the high leverage (around 6.2x after the buyout) proved too risky for some buyers in this environment when many are moving away from triple-C risk and into higher rated bonds.

Left lead Deutsche Bank declined to comment.

Entegris

Ba1/BB+/BB rated semiconductor parts maker Entegris offered investors a much different proposition to Intertape when it hit the bond market on Thursday, following a short lived rally across markets after the Fed’s 75bps rate hike.

Entegris priced a $895m SUN due in 2030 but it too paid up with a 5.95% coupon at a 90.83 OID for an all-in-yield of 7.5%. At that rate, Entegris’ coupon is some 232bps wide of where it was able to price its 3.625% SUN due in 2029 last year and some 60bps wide of where that note was trading, in the 6.9% area.

The yield to maturity on Entegris’ outstanding notes (source 9fin)

Entegris is using the funds to complete its previously announced acquisition of CMC Materials.

You get what you get

Intertape and Entegris are the latest in a line of issuers who felt it was better to push through the volatility to get their deals done, instead of waiting for possible stability.

It’s unclear whether the hotly anticipated LBO financings from the likes of Nielsen and Citrix — which both announced multi-billion dollar buyouts in the first quarter — will follow in the near term.

Both deals were expected to launch after Memorial Day weekend, but two buyside sources said market conditions could mean it’s now more likely to see the deals launch after the July 4 holiday.

“Some issuers are going to go ahead and issue something now and others are saying they don't have any needs in the near term so they’ll just wait it out — however long that ends up being,” one levfin banker said.

But this week’s deals again show that issuers will have to pay up to access the market.

Intertape Polymer was the most stark example this week, but software provider Kofax also had to improve the pricing on a $1.346bn TLB which was sold to help fund its buyout by Clearlake and TA Associates. The loan cleared the market at S+CSA+525bps on Wednesday morning, with a 93 OID — at the wide end of its initial 93-94 guidance.

Talent agency Creative Artists and transportation company First Student also launched M&A financings this week, setting OID guidance at 96 and 94-95, respectively. This kind of pricing would have been relatively rare in the not-so-distant past, but has become the clear norm.

“Arrangers don’t want to increase the spread, so they’re taking off from the OID instead. The market is really at an inflection point,” one credit analyst said.

Commitments are due Friday for a $500m term loan due 2027 from Avaya, which will be used to retire an out-of-the-money convertible note due next year and extend the company’s runway to ride out weakness in the tech sector.

Other in-market loan deals include an $850m TLB from Dave & Buster’s to back an M&A deal, which is currently talked at 96-97 OID. Commitments are due on 22 June. While the entertainment and restaurant chain has relatively low leverage (2.4x on a gross basis), the deal is still at risk of pricing wider as inflation eats into customers discretionary income, sources said earlier this week.

Another deal being lined up for next week is a $1.75bn TLB for auto parts manufacturer BBB Industries, to fund yet another Clearlake LBO.

“Deals can still get done, but to price above 96, companies need to have good free cash flow and a really good growth story that investors can get behind,” a second credit analyst said, pointing to software firm CDK Global, which managed to price its $3.6bn TLB at SOFR+450 with a 97 OID last Friday.

What now?

On the bond side, while all-in yields might now look tempting, investors see room for further widening in credit spreads that could make them less confident about buying the dip.

High yield effective spreads across the broader asset class have moved more than 100bp wider this month to 517bp over Treasuries as of Thursday’s close, according to ICE BofA data.

“Where do high yield spreads have to go for people to start buying again — does 700bps get you excited? Is 600bps enough?” said Eric Hess, a portfolio manager at Newfleet Asset Management.

During the pandemic HY spreads broke out to around 1,000bps over and during the financial crisis they rose to 2,000bps over.

BofA says both of those are too high of a mark for the current market but that a recession could see spreads peak at just over 700bp and average in the 600bp-650bp range, according to a report. This means the HY cash index is about 70% of the way to pricing in a recessionary outcome in HY.

“While we cannot forecast the exact timing and circumstances of where the market bottoms out, we can confidently argue that current levels offer a good entry point for long-term investors,” Oleg Melentyev, a credit strategist with BofA, wrote in a report this week.

And yet, there’s little sign that investors are lining up to try and buy bonds at sharply discounted levels, given the economic uncertainty and heavy fund outflows keeping cash balances top of mind.

“I haven’t heard of anyone doing that just yet,” a high yield ETF manager said. “I don’t know anyone who is actively out there buying.”