US LevFin Wrap — Primary momentum picks up, but don’t call it a comeback yet

David Bell
+William Hoffman
+ 1 more

10 November 2022•6 min read

The crack in the primary market window that has opened up in November was wedged further ajar with a flurry of bond and loan deals this week.

Aside from the ongoing sagas of Tenneco and Nielsen’s LBO debt, the borrowers that jumped into the market were mostly highly rated, well-known names.

Ba1/BB+ rated packaging supplier Ball Corporation priced a $750m senior unsecured offering, and B3/B rated insurance broker Hub International launched and priced an $850m incremental term loan B to fund acquisitions in a one-day syndication.

The aerospace sector was well represented with new deals from Spirit AeroSystems and Spirit Airlines, which tapped its loyalty bond program for an additional $600m. There were also successful loan syndications for insurance broker AssuredPartners and power transmission belt maker Gates Global.

Looking forward, a lower-than-expected CPI print on Thursday could set a firmer tone for borrowers eyeing the primary market before Thanksgiving.

“It’s definitely going to open things up,” one levfin investor said.

“We’re in this technical air pocket where there’s not much in the primary, so we could see secondary levels improve which could draw issuers in,” he said. “If everyone is more comfortable with the terminal rate not going to 6% or 7% and inflation coming down we can be more comfortable buying some of this stuff.”

Coming up

Hints that the inflation outlook is improving might give investors more confidence to lean into riskier debt, said one high yield analyst.

“I’m not sure that means CCCs are back in vogue, because a recession is still in play but I’d expect more interest in interest rate sensitive stuff that has underperformed,” he said.

But even if there’s investor demand, who’s looking to issue?

Formula One, the media company for the global motor racing series is in market with a new $725m Term Loan A and $1.7bn TLB to refinance its existing TLB due February 2024. It will hold an investor call on Monday for the TLB portion.

Revving the refi engines (Wikimedia Commons)

Four Seasons Hotels and Resorts will also hold a call on Monday for a new $850m Term Loan B, joining Tenneco, Open Text, ANGUS Chemical, DXP Enterprises, Ingenovis Health and Delek in active syndication.

Beyond the Tenneco syndication, the supply outlook on the bond side is less clear. As we’ve previously explored, the high yield maturity wall for 2023 is low.

“I’d be hesitant to say the primary has opened up,” said a portfolio manager. “It’s more out of necessity than anything else. I don’t think it’s people saying ‘let’s turn the switch on for new issues.’ There’s a light maturity schedule for 2023 and 2024 and we don’t know what M&A will look like. I think issuance next year will be very much below average.”

Animal spirits

Two spirits — Spirit AeroSystems and Spirit Airlines — took advantage of the positive momentum in aviation to issue debt this week, with investors betting that customer demand will help them navigate some near-term headwinds and return to pre-Covid levels of cash flow generation.

Demand for narrow-body planes helped parts manufacturer Spirit AeroSystems price and upsize $900m 9.375% SSNs due 2029 at par as well as a $594m TLB due 2027. For full details on the offerings check out 9fin’s Credit, Legals and ESG QuickTakes.

Investors overlooked the company’s recent history of negative cash flow generation and focused on expected orders from Spirit AeroSystem’s largest customer Boeing, which is receiving ample demand itself from airlines eager to add more fuel-efficient aircraft to their fleets to reduce costs as gas prices remain elevated.

Myles Walton, an equity analyst with Wolfe Research, said Spirit AeroSystems’ cash flows will be determined by how well it navigates supply chain issues.

“It's not limited at this point by what the demand is, it's limited by part shortages and it is limited by a workforce that isn't the same as you had pre-Covid,” Walton said. “This is a rebuilding and restoration exercise both in the walls of Spirit as well as in the entire supply chain.”

Hoping for a smooth landing (Wikimedia Commons)

Assuming no supply chain hiccups, Spirit Airlines could be one of those buyers.

The airline tapped its existing $850m 8% SSNs due 2025 for a $600m add-on, which was upsized from an initial $500m size. The deal priced at 98.5 cents on the dollar, which is a discount from the 101 price the outstanding bonds were indicated at earlier in the week.

Proceeds will be used to redeem existing Enhanced Equipment Trust Certificates coming due next year and to enhance the company’s cash position.

The added liquidity will allow Spirit Airlines to better navigate some significant headwinds in the industry including a pilot shortage, continued inflationary pressures and aircraft delays in 2023, Fitch noted in a report this week downgrading the company’s issuer ratings to B+ from BB-.

Before the new debt comes due, Spirit is aiming to merge with JetBlue Airways (by the first half of 2024) in a $3.8bn deal. Indeed, this could be just the first of several airline deals to hit the market in the coming year.

Pay down

Plenty of companies are paying down their existing debt with cash on hand instead of braving the primary.

Coty, Bombardier, Commercial Metals Company and Rite Aid all announced cash tender offers for existing bonds this week.

Rite Aid’s offer comes with a sting. The company offered to buy back up to $200m of the $485m of 7.5% 2025 secured notes at a price of up to 75 cents on the dollar in a deal that could strip collateral from bonds that remain outstanding.

Although that price is roughly a five-point premium to where the bonds were trading, Fitch still described it as a distressed exchange for returning less than the par value to investors.

“The somewhat coercive nature of this exchange highlights the rising challenge Rite Aid faces in refinancing its 2025 maturities without a default,” Fitch said.

Elsewhere

Finally, the blowup in cryptocurrency markets continues to weigh on leveraged credits exposed to that asset class.

Two names heavily tied to crypto — exchange operator Coinbase and business intelligence firm/crypto investor MicroStrategy — saw their debt weaken this week amid the struggles at crypto exchange FTX that have weighed on digital currency prices.

Coinbase’s 3.375% 2028 and 3.625% 2031s are both down around 6-7 points this week to around 55 and 50 cents on the dollar, while MicroStrategy’s 6.125% 2028 has dropped around 10 points to a cash price around 74.

Away from crypto, Unisys’ 6.875% 2027 SSN are down around 15 points to a cash price around 71 this week after the IT company said it was conducting an internal investigation into its financial reporting.