US LevFin Wrap — Venture LNG prices $4bn bond, rate increases disrupt supply, M&A on the rise

William Hoffman

19 October 2023•5 min read

There’s a duality permeating the high yield bond space this week that’s making it hard for market participants to navigate the turbulence.

On one hand, Venture Global LNG priced the largest bond package of the year so far in a sign that demand is still out there. The $4bn two-part deal will be used to fund the liquified natural gas producer’s ambitious build-out plan of new facilities along the Gulf Coast.

But on the other hand, Venture was the only new bond deal to launch this week and pricing was also a bit shaky with yields moving as much as 75bps wide of the initial low-end estimates.

But at least Venture crossed the finish line, which is more than can be said of Global Aircraft Leasing Company’s $1.95bn senior PIK toggle notes that remain in limbo after two weeks of marketing.

GALC is the holding company for aircraft lessor Avolon. The Chinese parent structure above those entities is increasingly complicated due to a bankruptcy restructuring and the lack of available data on the company, investors said.

“It’s a troubled financing situation and the Chinese parent is demonstrating a lack of transparency,” one portfolio manager said. “There's a lot of questions about exactly how cash flows are going to work.”

To pile on top of those issuers, there are also some industry-wide engine issues in the airlines space that are exacerbating the mistrust between lessors/airlines and engine OEMs, as we reported this week.

Seven-year Treasuries from 2007 to October 2023 (via ICE BofA)

The lack of high yield issuance this week is largely explained by the rate environment. Seven-year Treasury yields have risen by more than 30bps since the end of last week to 5% — the first time it’s hit that level since 2007.

While investors say they are largely shrugging off the specific economic risks of the Israeli-Palestinian conflict, several noted that it's a reminder that credit spreads aren’t fully baking in these unexpected risks, making market participants more cautious.

“Optically the yields in high yield look attractive, but the spread is not, and we can replicate that type of return in other areas outside of corporate credit,” said a fixed income portfolio manager.

Even with these challenges out there, printing company Xerox could be the next to test the market with $555m of bonds that could launch before month’s end. The deal would refinance a bridge loan Jefferies provided to fund the company’s recent repurchase of its own stock from Carl Icahn.

Timing could be tricky, even if the Venture deal proved demand is still there.

“One week it's the worst week in high yield in five years and the next week the returns are off the charts,” one sell-side source said. “High yield at these equity-like levels is compelling, which is historically a good opportunity to take a long-term view.”

Steady supply

For as wobbly as the bond market is, loan issuance continues to be steady.

Action Retail was already one of the largest Euro loan borrowers and now the non-food discount store chain adds to its debt stack with its inaugural US dollar deal. The $1.5b TLB due 2030 received strong demand and was upsized by $500m, despite funds going toward dividends and share buybacks for its sponsor 3i.

Home security company ADT also priced its TLB due 2030 this week, but had to shave off $25m in size to land the $1.375bn loan. The company still managed to keep spreads low at just 250bps over SOFR with a 99 OID.

Canadian facilities management business BGIS is also in the market this week with a sizable $916m TLB due 2028. Proceeds are slated to refinance two outstanding loans and future acquisitions, of which the company has already been quite active with 13 tuck-in transactions over four years.

Acquisitions accelerate

The M&A machine is starting to kick into gear with a few notable deals added to the pipeline this week.

Clothing company True Religion rebounded well from its 2020 bankruptcy and this week we reported that the company retained RW Baird to advise on an upcoming sale process.

Perhaps it’s a sign the M&A is picking up in the apparel space following a string of similar deals including Tapestry’s (owner of Coach and Kate Spade) acquisition of luxury fashion house Capri for $8.5bn in August, and Hanesbrands’ decision to evaluate a potential sale of its Champion athleisure business.

Elsewhere, fiber network company Zayo is exploring options to refinance its $9bn debt stack, including the potential sale of its European business. The company could also explore a securitization backed by its dark fiber network, similar to the one Frontier Communications closed in August. The outstanding bonds rallied in secondary trading.

Prices rose by 5-6 points this week on Zayo’s outstanding loans (via 9fin)

Some M&A is already being funded in the loan market. Broker-dealer Cetera Financial is out with a $1.689bn add-on TLB due 2030 that will fund its $1.2bn acquisition of wealth management firm Avantax.

Cetera has benefitted from rising rates but could equally feel some pain if the Fed begins to cut rates, as we detailed this week.

In a more turbulent deal, MedImpact launched a loan syndication at the end of September that gained little traction because of a mysterious acquisition target. That buyout target was revealed this week to be Rite Aid’s pharmacy benefits manager Elixir Solutions as the drug-store looks to shed assets after filing for bankruptcy.

There are some other issues to consider as we’ve previously detailed, but the reduced size of the debt raise is injecting some new life into the offering.