US LevFin Wrap — When is a lockup not a lockup, Wheel Pros skids out, Michaels crafts a rebound

William Hoffman
+Will Caiger-Smith

16 December 2022•6 min read

With the window for new issuance slightly ajar in recent weeks, it’s no surprise that bankers have sprung into action to close all manner of deals. Still, some of them are slightly more surprising than others — the recent selldowns of Citrix’s term loan A debt, for example.

There’s been a steady drip-feed of news around this over the past couple of weeks, identifying Barclays, Morgan Stanley and Citi (among others) as sellers and the likes of Apollo, Franklin Templeton and Diameter Capital Partners as buyers.

But the sudden appearance of all this paper on the market came as a surprise to many buysiders, who fully expected the TLA to hit the market at some point, but had anticipated it would happen in a slightly more coordinated fashion.

“We kind of expected a full re-syndication, a more marketed effort,” said one portfolio manager familiar with the situation.

These expectations were in part because of an agreement between arrangers around how and when they could offload the paper after the official syndication.

Multiple sources with knowledge of this agreement continue to refer to it as a “lockup period”, but it has substantial caveats: banks can sell, so long as they’re not actively soliciting bids, and so long as they offer other banks in the syndicate a chance to hit any bids that come their way.

The sales so far have mostly been in the high 80s. Clearly that was good enough for some banks, perhaps under pressure to shift the risk before year-end, but we hear others are still holding onto all or some of their exposure (lead arranger BofA declined to comment).

During the original Citrix TLB syndication, one of the fears buysiders kept repeating was that the banks would flood the market with TLA paper and depress trading levels in the TLB.

There may be something to that: as you can see in the chart above, the TLB is still quoted above the levels at which the TLA was sold, but has slipped slightly since news of the selldowns began leaking out.

Fire it up

Market sentiment continues to whipsaw on a daily and weekly basis, amid a maelstrom of conflicting signals and data. But there’s no doubt that the vibe has been more optimistic in the past few days.

For one thing, there’s been some M&A. Earlier this week, BDT Capital Partners announced a take-private deal for grill-maker Weber in a bet that consumer demand will eventually return after inflation and dwindling consumer spending power took a toll on earnings.

Investors responded positively to the take-private announcement, noting that BDT appears prepared to support the company through a potentially difficult period, as we reported earlier this week.

And today, Advent International announced plans to take satellite company Maxar Technologies private in a deal valued at $6.4bn including existing debt. For some history on this credit (and its connection to the war in Ukraine) check out our deep dive from back in June.

These deals were announced against a slightly more bullish credit backdrop: the latest CPI print shows inflation is coming down and the Federal Reserve slowed its pace of rate hikes this week (although it remains hawkish).

Inflation receding (via US Bureau of Labor Statistics)

These recently announced take-privates can look to recent levered M&A financings for encouragement: just last week, gas handling company Chart Industries found strong investor demand for the debt backing its takeover of Howden, first announced in early November.

Naught vs nice

Retail sales and manufacturing slowed in November, according to industry-wide metrics. But retail earnings in the levered credit space show a more nuanced picture.

Office supplies store Staples and craft supplies retailer Michaels reported strong third-quarter results this week. At the same time, Wheel Pros debt entered a tailspin, as the auto wheelmaker reported a massive deterioration in margins and dwindling liquidity.

Still, average speculative-grade yields have tightened more than 125bp in the fourth quarter to 8.1%, according to ICE BofA data. The loan index has also rallied a couple of points; just like current fashion trends, it is heading back towards the mid-nineties.

“The loan index is creeping higher,” said a banker. “I think we all hope that if we continue to get good news, and this week’s CPI print is one of those, we can continue to grind tighter, and maybe make our way back to the mid-90s.”

Despite these recent positive signs, and increasing optimism that the Fed can pull off a soft landing, the base case is still a recession sometime next year.

There are plenty of risks still out there: China’s reopening is off to a rocky start, Covid cases are increasing in the US and the Fed is still cautioning that more rate hikes are warranted next year. But you can forgive people for latching onto a little optimism.

“We don't expect a sudden resolution to the problems that financial markets are currently faced with,” said a portfolio manager. “But we definitely have the building blocks in place for things to stabilize, and for the market to absorb some of these shocks.”

You tweet it, you eat it

One place where optimism is less apparent: Twitter. This week, news emerged that Elon Musk is shaking up his legal team and auctioning off assets including industrial-grade kitchen equipment, as the newly private social media company confronts the reality of its debt load.

In another turn of events, Twitter has also suspended the accounts of several journalists that had reported on Musk (we’re happy to say that 9fin’s account remains active). It also suspended an account that tracked the movements of Musk’s private jet.

What does this all mean for the debt?

Well, for one, there must be a lot of frustrated bankers out there. It can’t be fun watching other banks (or your own colleagues) successfully offload their LBO bridge exposure while simultaneously digesting the parade of troubling headlines out of Twitter.

As many bankers like to put it, investment banks are in the moving business, not the storage business. “The worst thing you can do [with hung LBO debt] is sit there with it for six months and something happens to the company,” said one.

With Twitter, they don’t seem to have many other options right now. The Elon show continues!