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William Hoffman

Will Caiger-Smith

Bankers have played a waiting game all summer, biding their time for the right opportunity to syndicate the large LBO financings weighing down their balance sheets.

A few weeks ago, many hoped the rally that started in July would extend past Labor Day weekend, providing a supportive backdrop to help minimize losses on underwritten deals for Citrix, Nielsen and Tenneco.

That hasn’t happened, and anticipating these deals is starting to feel like Waiting for Godot, the seminal Samuel Beckett play in which two characters pontificate, philosophize and squabble while waiting for the titular character to arrive.

The crucial difference is that while Godot never turns up, these LBO financings are contractually obliged to (although at this point the outcome of the Twitter deal is anyone’s guess). But until they do, the primary market will continue to be defined by their absence — just like Godot.

Where the hell is this guy?! (via Flickr)

And so the continuation this week of the selloff that Jay Powell sparked with his speech at Jackson Hole is weighing heavily on markets as we head into the holiday weekend. So is today’s jobs data, which suggests the labor market is still pretty hot despite the Fed’s actions.

“The market went from being very sanguine to being laser-focused on inflation,” said a buysider. “Bankers have waited a long time and they hoped that market conditions would improve, but now we’re back to where we were.”

Average high yield OAS is now 79bps wider since August 15, at 503bps, according to ICE BofA data. The 10-year Treasury rate is back above 3%, and average high yield index effective yields are more than 115bp wider to 8.34% since their recent lows.

“The market is underestimating the Fed’s resolve, and I think the Fed is going to apply a bitter medicine to cure this inflation issue,” one investor said. “Higher for longer” was the conclusion on this week’s Cloud 9fin podcast, with Jeremy Burton of PineBridge Investments.

Investors reacted by pulling $5bn from high yield in the week ended August 31, according to Lipper. That makes for two straight weeks of outflows, totaling $9.5bn.

The rollercoaster summer of ’22 (via ICE BofA)

Even so, bankers appear poised to launch the financing for Citrix’s take private deal early next week, as soon as market participants return to their desks after the long holiday weekend (check out our evaluation of the credit story, from last week).

Whether it comes or we have to wait further, that deal is expected to dominate proceedings for a while.

Other underwritten LBOs are also holding the market back, including Apollo’s purchase of Tenneco (our coverage here) and Elliott and Brookfield’s takeover of Nielsen (see our deep-dive here) which has finally received shareholder approval.

Even after all the anticipation, these deals will encounter an increasingly wary buyside. “It's a really treacherous investing environment,” one portfolio manager said. “I don't think there's anyone that's jumping up and down and really excited about putting money to work right now.”

That goes for private credit firms too. In this week’s long read on the unitranche market, we explain how direct lending firms are reducing hold sizes and generally dialing back on risk, making it harder to club up the giant deals that have dominated the market in recent years.

On top of the worsening macro backdrop, several individual credits shared negative news this week.

Bausch Health announced a $4bn distressed exchange, in which investors would have the option to get out of the company’s senior unsecured notes and into newly issued first-lien and second-lien debt.

S&P said it considers the exchange tantamount to default and lowered Bausch Health’s issuer credit rating to CC from CCC+. Likewise, Fitch downgraded the company to C.

“It’s a total disaster,” said the aforementioned portfolio manager. “This could lead to more exchanges, and it’s a situation where we think there is potentially less asset coverage given the company’s patents and when they expire.”

Elsewhere, MicroStrategy — the information technology company turned crypto investing vehicle — is facing a new lawsuit after Washington DC’s attorney general sued its former CEO, Michael Saylor, for allegedly evading more than $25m in taxes.

MicroStrategy, which has made waves by issuing high yield bonds to fund its Bitcoin purchases, is accused of helping him do this. The company’s stock fell by more than 7% on the news, but its $500m SSNs due 2028 held firm, down only half a point by Friday morning at about 83.

The Twitter saga continues to play out, with the company now fighting with Elon Musk over allegations of poor security practices after a last week’s whistleblower report. The case is still headed for court in October, which may determine the outcome of the LBO financing.

Meme-stock retailer Bed Bath and Beyond bought itself some time with $500m of new financing, including a $375m FILO facility led by Sixth Street and an upsized $1.13bn ABL led by JPMorgan.

The company also filed for an equity offering — but it appears to have missed the boat, as its stock is tanking again. The retailer is still facing an uphill struggle to overhaul its business after years of flagging sales.

Power generation company Lightstone Generation managed to get a privately placed deal over the finish line this week, to pay down a little more of the stub that was left over from its amend-and-extend deal earlier this year.

This means an increase in interest costs thanks to the replacement paper’s higher coupon, but the deal further pushes out its maturity profile — another chapter in the company’s dramatic reversal of fortune in recent months.

Jamie Dimon clamps down on remote work (New York Post)

The security flaws that make Twitter’s insider threat so scary (The Verge)

Royal Caribbean will equip all ships with Starlink internet (TechCrunch)

Private equity firms scramble to recruit junior bankers (Insider)

Wall Street’s $1bn messaging nightmare (FT)

Mikhail Gorbachev did not mean for the Soviet Union to end that way (The Economist)

Japanese KitKats and what they tell us about American candy (The Atlantic)

How to pronounce EBITDA, by shoe type (Twitter)

Lukoil chair, critic of Ukraine invasion, dies after fall from window (FT)

US LevFin Wrap — Waiting for Godot, the LBO remix

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