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Market Wrap

US LevFin Wrap — Newfound serenity, or the eye of the storm?

Emily Fasold's avatar
David Bell's avatar
William Hoffman's avatar
  1. Emily Fasold
  2. +David Bell
  3. + 1 more
5 min read

August is a notoriously sleepy month for new issuance, but there was a flurry of new debt issuance this week as borrowers scrambled to take advantage of improved market conditions ahead of an expected post-Labor Day rush.

Amid the recent market rally, the FOMO factor is ramping up. Buysiders are eager to deploy cash after a prolonged slow period, and borrowers are looking to lock in lower rates after months of sky-high spreads.

Bonds led the way this week amid improved borrowing conditions. The ICE BofA HY index moved to 433bps over Treasuries as of Wednesday — slightly wider than last Thursday’s tight of 421bps, but nearly 100bps tighter than this time last month.

Cruise operator Royal Caribbean Group, which priced $1.25bn in senior unsecured notes due 2027 on Monday, is one of the latest issuers to take advantage of this backdrop.

Full steam ahead

The deal saw strong demand, allowing the leads to upsize it from $1bn and tighten pricing to 11.625% from initial thoughts of around 12% — a feat that would have been significantly more difficult just a couple of months ago (for more detailed coverage of the deal, click here).

“It’s a food fight in high yield primary, with people scrambling for paper since there’s been no supply coming into the asset class,” one portfolio manager said. “This is leading to tighter pricing, even though new issue concessions have not been materially attractive.”

However, sources cautioned that Royal Caribbean’s facility could trade off significantly if the market falters off, adding that “it was fine, but not screaming buy.” Cruise operators are recovering but still have large debt loads after the pandemic.

Supersizing

Automaker Ford also timed the market well, launching and pricing $1.75bn of 6.1% 10-year senior green bonds on Tuesday, amid news that Congress is preparing to sign a new climate bill.

The deal, which saw $5bn of demand, is the largest new bond issue since Tenet Healthcare’s $2bn offering of senior secured notes on 1 June.

Other new supply included EnLink Midstream’s new $700m 6.5% senior notes due 2030, which (like Royal Caribbean’s deal) were also upsized, from an initial target of $500m. The energy services provider will use proceeds to fund a tender offer for existing notes.

“It’s interesting that Ford and EnLink picked August, but they’re trying to benefit from the nice rally we’ve had,” a second portfolio manager said. “The lack of market supply works in their favor.”

Spanish language broadcaster Univision Communications also upsized a bond deal this week. The company priced a $400m add-on to its existing 7.373% senior secured notes due 2030, at a 101.5 OID. Proceeds will be used to refinance existing debt.

Its possible that the success of the deal — which comes just weeks after its competitor Hemisphere Media launched a $370m TLB — could act as a catalyst for other opportunistic refinancings, one analyst said.

“Univision’s bonds are trading over par, so with that going well, you might see someone follow up with an opportunistic deal,” the analyst said.

Speaking of opportunistic refinancings, The Chef’s Warehouse priced its $600m TLB at an OID of 98 this week (see our previous coverage here). Citadel Securities also followed up its record 2Q earnings report with a new loan deal, with proceeds slated for general corporate purposes.

Elsewhere in loans, Eyecare Partners supplied a new deal to fund tuck-in M&A. The company was also able to upsize, pricing a $250m TLB this morning at SOFR+CSA+450bps with a 50bps floor and a 93 OID this morning.

Eye of the storm

While the new supply of paper is a positive sign of (at least temporary) market confidence, the broader outlook for markets is still extremely uncertain and it is unclear how long the recent rally will last.

Inflation is still a major pain point for companies and consumers, and recently released minutes from last month’s Federal Reserve meeting show that officials do not intend to pull back on interest rate hikes until inflation cools substantially.

Earnings season will provide more critical insight into how inflation is impacting the economy. Results thus far have been mixed, with some sectors (like travel and leisure) doing better than expected, and others (such as retail and apparel) missing the mark.

“We might be in the eye of the storm,” said Hunter Hayes, a portfolio manager at Intrepid Capital. “I don’t think this rally is sustainable. It feels like its largely FOMO-induced and nothing fundamental is supporting the tightening in spreads.”

Looks like rain

Another portfolio manager noted that, as ever, the difficulty with riding the recent rally is uncertainty about the future: “It’s hard to say whether this is just a pause and there will be more rocky times in the fall, or if this is the new base. Where we go from here is the real question.”

What this week’s recent flurry of activity means for the market’s big hanging LBO deals is still anyone’s guess. Bankers working on the Citrix syndication are still engaging with buysiders on various strategies — the latest apparently includes a new euro-denominated loan tranche.

In other news, the burgeoning saga around Avaya entered a new chapter this week. Secured lenders hired counsel (Alvarez & Marsal and Centerview, according to Bloombergto lead negotiations with the company after its sudden drop in earnings.

Elsewhere in earnings, Cision’s second quarter numbers revealed more margin pressure (see our full story here). More broadly, inflation is beginning to hit middle market companies and impact default rates for direct lenders.

John Fraser of Tikehau Capital, our guest for this week’s episode of Cloud 9fin, has tips on how to select inflation-resilient credits. Meanwhile, check out our latest 9Questions interview with Kevin Hwang of Macquarie’s principal finance group for more insight on direct lending.

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