US LevFin Wrap — Apollo doubles down on Tenneco, ION charges back into HY

David Bell
+Bill Weisbrod
+ 1 more

26 April 2024•7 min read

Rising tensions in the Middle East and worrying inflation data might have taken some of the wind out of the credit market’s sails in the last week or so, but primary market flow has been fairly persistent.

With high yield spreads tightening after gapping out last week, RBC decided the timing was right to offload the bridge financing it committed to Apollo’s buyout of Tenneco back in 2022, with a $365m senior note sale launched on Wednesday. The deal was promptly sold to…Apollo, according to 9fin sources, which adds to the asset manager’s $532m position in the bridge that it disclosed in filings last week.

Software publishing company ION Corporates also completed an upsized $830m equivalent cross-border bond dealat the tight end of talk, a couple of months after another ION Group subsidiary, ION Markets, pulled an attempted $1.7bn loan repricing.

Sponsors have enough confidence in the market to launch dividend recaps, with Anchor Packaging teeing up a $725m facility to extend $522m of 2026 TLB debt to 2029 and pay a roughly $203m dividend to majority owner TJCand minority owner Hermann Companies.

Commitments on that deal are due 30 April, giving investors some time to parse Thursday’s mixed economic data. Stronger than expected inflation, and weaker than expected economic growth, mean the rates outlook is getting muddy again and causing some secondary volatility, but that doesn’t mean borrowers are shying away entirely.

“Some opportunistic deals that were getting ready to launch may be standing down,” said one leveraged finance banker in light of recent macro data. “But we had 6-7 repricings [on Tuesday] and you don’t usually see that when people are in wait and see mode. It’s an interesting dynamic.”

One deal waiting in the wings is the funding for New Mountain Capital’s investment in the US arm of accounting and advisory firm Grant Thornton. A bank group led by Deutsche Bank is in the process of structuring the deal, which could have a similar profile to peer company EisnerAmpner, sources told 9fin.

Ups and downs

Secondary loan prices have been supported by the “higher for longer” narrative that has once again taken hold, as well as robust CLO formation, light new issue supply, and 18 consecutive weeks of fund inflows, according to JP Morgan.

The loan market has generated a 3.2% gain YTD and 48% of loans are trading above par, the highest since October 2021, according to JPM. That’s largely why the market has continued to see loan repricings. This week included repricings from salt company Morton, event manager Viad, Permian pipeline biz Brazos Midstream, and private school operator Spring Education.

“The loan market, despite trader movements and some macro volatility, is pretty well bid,” said a syndicate banker. “It’s a little off the peak, but you still see companies offering repricings and investors have been focused on keeping assets at work.”

The high yield index is being buffeted by the impact of rate moves and tight credit spreads, which remain close to multi-year tights. BofA pointed out on Friday that 40% of the HY index now trades below 200bps — which historically has been IG territory.

Overall, HY bonds are suffering their worst month since October, with 1.3% losses so far this month, according to JPM, underperforming loans by 183bps. Average HY spreads gapped out around 30bps last week to 342bps over Treasuries, though they snapped back to 319bps as of Wednesday, according to ICE BofA data.

Despite this volatile backdrop, companies are still bringing new bond deals to take advantage of pent-up demand.

Aside from ION, notable bond pricings came from train line operator Brightline’s $1.325bn 11% 2030 SSN (upsized but priced at wide end of talk), mountain resort company Vail Resorts’ $600m 6.5% 2031 SUNs (priced inside high 6% IPTs), and theme park operator Six Flags’ $850m 6.625% 2032 SSNs (priced inside 6.75% price talk).

Single-B rated Brightline was the exception, with all other deals printed at an average of 35bps below the mid-point of IPTs, according to a note from R. Seelaus. Follow-on performance has been mixed — this week’s new issues are bid up an average of just 1/8 point and half of them are essentially flat-to-down, the report said.

“We haven’t seen a massive pullback in terms of appetite,” said the syndicate banker. “The market is open, it’s just a little more sensitive for issuers to bring a deal right now.”

Food for thought

United Natural Foods divided opinion with a debt refinancing this week, but ultimately was able to tighten the pricing on a $500m TLB due 2031 to SOFR+475bps and a 98 OID, in from price talk of 500bps-525bps and 97-98. The deal was expected to close on Thursday.

Several investors pointed out the challenges facing the high-end grocery segment: inflationary pressures push customers to trade down for cheaper options, putting pressure on the independent retailers that UNFI supplies. However, others pointed out the company’s attractive portfolio of industrial real estate, which gave them some comfort.

“I think the business needs to exist but it’s tough — the customers that really need them are consolidating or slowly going out of business. But they do have a ton of real estate value,” said a CLO manager.

Another food distributor, Del Monte Foods, is working with PJT Partners to raise secured debt as it seeks to boost liquidity in light of high costs and declining sales, sources told 9fin. The company is specifically seeking a $300m first-in, last-out (FILO) loan.

American Greetings priced an $800m TLB due 2031 this week to finance a dividend to its sponsor CD&R. As we previewed last week, investors are wary over the outlook for the physical greeting card market, so the loan was being offered at a generous yield. Banks ultimately priced the loan at 575bps over SOFR, at the tight end of 575bps-600bps price talk, but the OID landed at 98, from talk of 98-98.5.

Similarly, there was some back and forth on the terms of Brock’s $525m TLB due 2031, which is due to price on Friday to refinance existing debt. The scaffolding and industrial service provider, owned by AIP since 2017, tightened pricing on the loan to SOFR+600bps with a 98 OID, in from 625bps at 97-98. The loan size was increased by $25m to reduce drawings on a new $150m ABL. But the documentation was also tightened to add margin step-downs and stricter terms on debt incurrence, restricted payments, and investments.

On the move

Earnings season prompted trading activity this week, with Hertz bonds sliding 2-3 points on Thursday after the car rental company reported a second consecutive quarter of negative EBITDA. The company also reported an uptick in vehicle depreciation, which partly came from the electric vehicle fleet it is holding for sale. The notes continued to slide another couple of points on Friday.

Graftech International’s 9.875% SSNs due 2028 were up around three points to 76 on Friday after the company reported Q1 24 earnings.

The graphite electrode and coke petroleum producer reported breakeven EBITDA, negative free cash flow of $11m, and $275m of liquidity across cash and revolver capacity, but said it had made progress on reducing costs and raised its guidance on further cost reductions this year.

We’re also keeping an eye on US Silica, after Apollo announced a deal to acquire the company for $1.85bn on Friday. The company, which produces frac sand and commercial silica — critical inputs for oil and gas production — has been cleaning up its balance sheet while benefiting from rebounding demand after the Covid slump wiped out several of its peers in the space.

Last month, US Silica retired $25m of its originally $950m TLB due 2030 with cash on hand, as well as repricing the spread 75bps lower to 400bps over SOFR. We wrote about the trajectory of the company back in March 2023 when it issued the 2030 TLB.

Ahead of cruise line earnings, our credit analysts did a deep dive on secondary opportunities in the sector and highlighted three notes from Carnival, Norwegian and Royal Caribbean that could still generate double-digit returnsdespite the appreciation and credit improvements already made across the board.

And if you — like most of the market — have strong feelings about Platinum Equity one way or another, we just published a feature looking at triumphs such as Yak Access alongside more contentious deals like Incora.