US LevFin Wrap — Altice and Asurion put spotlight on CLOs, tricky refis in play for Herbalife and Russell Investments

David Bell
+Bill Weisbrod
+ 1 more

29 March 2024•7 min read

Drama across the pond in Altice’s sprawling capital stack kept US leveraged finance investors on their toes this week, while some trickier deals such as Russell Investments labored to get done in a primary market that’s still cautious around riskier names.

The French telecom company’s faceoff with investors over how €2.1bn of proceeds from asset sales will be used — and talk of haircuts to reduce leverage — has spooked holders of Altice France debt, which is held widely across both US and European CLOs. (We’ve written nine articles on the situation over the past two weeks, click here if you missed any).

Moody’s and S&P both downgraded the company to triple-C this week, but that’s not an immediate reason to panic. As our CLO team reported on Thursday, the downgrades “would only increase marginally the number of [CLOs] breaching triple-C tests, but would not lead to major OC breaches, or forced selling.”

Another widely held name among CLOs, Asurion, also dipped in secondary trading this week after it asked to delay its earnings report to investigate a non-compliance allegation. Roughly $5.96bn of the insurance company’s debt is held by CLOs, according to the latest trustee reports. Of those, funds managed by Octagon Credit held the most with $392m.

There was good news however for investors in Apollo-backed retailer Michaels Stores. Despite flat sales in Q4, the company posted a 50% jump in EBITDA thanks mainly to falling freight costs, which have dragged the company’s margins in recent years. The company’s unsecured notes were up roughly eight points, with lenders encouraged by sizeable debt buybacks during the quarter.

Maturity walls

A flood of high yield bond refinancings from the likes of MGM Resorts, Phinia and ESAB at the start of the week highlighted how attractively tight the bond market is for borrowers. The latter two were able to upsize their deals and price inside of talk.

Even if coupons are higher than when companies were borrowing in the aftermath of Covid, the average HY spread over Treasuries in the index is just 346bps and touched a five-year low of 339bps on 21 March, according to JP Morgan.

Companies are also bringing more secured bond financings to moderate their cost of capital, including AMC Networks which raised $875m 10.25% SSNs due 2029 via Bank of America on Tuesday.

The notes were upsized from $700m and priced below talk, but still came at a generous premium relative to its Ba3/BB ratings, reflecting the complicated future of TV, streaming and content production. The additional secured debt also prompted downgrades from Moody’s and S&P.

Paramount Global’s downgrade to high yield by S&P was another signal of those pressures. The move came as buyers including Byron Allen and Apollo table bids for the company or some of its parts, including the studio business.

While several HY borrowers were able to issue upsized deals and tighten pricing, Apollo’s B2/B rated home builder The New Home Company downsized its planned senior unsecured issuance to print a $300m 2029 note at 9.25%, after initially shopping a $325m note at 8.75%-9%. As we noted in our Credit QuickTake, rising interest and mortgage rates have dented volumes and margins, and operating free cash flow.

Tricky business

On the loan side, deals from Herbalife and Russell Investments stood out as tougher sells amid a shower of repricing and refinancing activity that continues to generate the usual gripes on the buyside.

“The companies ratchet down the spreads they’re paying and then bankers will benchmark the next wave of deals after them, so it’s frustrating on the buyside right now,” said one lender.

On top of cutting the coupon, many companies including Medline are also stripping the CSAs put in place when loans were switched from Libor to SOFR, effectively boosting the cost savings they’re able to achieve.

Sources said the Herbalife refi would test whether primary markets might be open to some dicier refinancing situations. Rated B1/B at the corporate level, earnings at the health and wellness company have deteriorated thanks to evolving consumer tastes, but the loan refinancing is being pitched to lenders at attractively wide levels that might overcome those risks. Commitments are due April 3.

There have been relatively few deals from low rated issuers this year, as investors remain cautious around highly levered credits. Just 25% of loan supply this year has been rated B3 or below, compared with a decade high 34% over the course of 2021, according to JP Morgan.

Expectations around the timing of Fed rate cuts are a moving target, and higher for longer might mean trouble for heavily indebted companies.

“We think the Fed funds rate is more likely to settle in the 2-4% range as opposed to 0-2%,” wrote Oaktree co-CEOs Robert O’Leary and Armen Panossian in a research note on Thursday. “This is significant because we believe many leveraged companies will have trouble refinancing their debt as long as interest rates remain above 2%.”

Some of that caution is playing out in the primary with Russell Investments’ yet to cross the finish line with its 2025 loan amend and extend, after the initial commitment deadline passed on 22 March.

An ad hoc group of lenders to the company organized with Gibson Dunn, the majority of which were expected to support the $1.2bn TLB, which includes a PIK element. However, the challenge is getting the rest of the investor base on board.

A $4bn loan repricing and refinancing from Ba2/BB rated concrete company Quikrete is also still outstanding, after the commitment deadline passed on 22 March.

New money

Morgan Stanley printed a $815m TLB to support Arcline Investment Management’s $1.8bn leveraged buyout of aerospace parts manufacturer Kaman this week.

There’s been plenty of appetite in general for new money deals, but investors said they were drawn to the company’s inventory-lite model in particular as well as its expected shift under private ownership to focus on its lucrative, high-margin engineered products segment.

Bankers continue to express confidence that more transactions will come to fruition and boost volumes later in the year. Inflation appears to be stabilizing alongside corporate earnings, and buyers and sellers are taking a more sanguine view on rates which is all helping things move forward.

“My sense is that the market is heating up,” said one M&A advisor. “I think it will rapidly shift from a trickle to being wide open. The market has decided rightly or wrongly we will avoid a recession or it will be pretty insignificant.”

Indeed, JP Morgan almost doubled its gross supply forecast for 2024 to $700bn from $375bn this week, and upped its net (i.e. non refi or repricing) issuance forecast to $145bn from $120bn.

“It’s busy looking at refi and recap loans and a little M&A but not much,” said a syndicate banker. “I expect some degree of floodgates to open this spring or this year.”

One positive signal for private equity sponsors is Home Depot’s acquisition of roofing product distributor SRS Distribution from Leonard Green and Berkshire Partners for $18.25bn, which marks one of the largest ever private equity exits.

“Companies are trading at high stock prices, debt is relatively low, so it’s a good time for strategics,” said the M&A advisor. “It’s harder to compete if a strategic wants to double down but I still I think we’ll see a lot of LBO and M&A volume in the second half.”