US LevFin Wrap — Credit markets get the X factor

David Bell
+Sasha Padbidri
+ 1 more

31 January 2025•5 min read

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The AI panic around DeepSeek drove volatility in tech-heavy US stocks this week, but that didn’t throw leveraged credit markets off their stride — or deter Morgan Stanley from leading efforts to quietly market a multi-billion dollar chunk of Twitter/X debt to investors.

Even with the noise around AI, it’s hard to think of a better time for the banks to try and offload the hung deal. Musk’s closeness with the new Trump administration is clearly helpful — and may be encouraging advertisers to return to the platform, giving the company’s financials a welcome boost.

On top of that, debt investors are still desperate for supply. This is nothing new, but cash continues to flood into floating rate loan and CLO funds, and there are not enough new issue deals to soak it up — so far, 2025 is shaping up to be the slowest start to a year for capital markets since 2016, according to JP Morgan.

Via 9fin data (Chart). See our 2024 LevFin Primary Review here.

That’s partly why high yield, leveraged loan and CLO markets remained steady this week even as the Nasdaq whipsawed. And even if cheaper AI poses a threat to some of the investment theses around data center spending and tech capex in general, some levered credits particularly in the software sector might ultimately benefit from that trend.

“The implications are much more meaningful for the large-cap growth tech companies,” said one portfolio manager. “With respect to issuers in the HY universe, there’s been impact at an idiosyncratic level but it’s certainly not pervasive at the moment. This was maybe viewed as a buying opportunity for some but wasn’t overly meaningful in terms of price action or spread activity.”

A big risk on investors’ minds? Record tight spread levels and high equity valuations give little room for error.

“There hasn't been a lot of spread widening around this AI stuff yet, but what might seem like tangential type of news items can lead to spread widening, because we're starting from very, very tight levels overall,” said a bond investor.

Slow start, strong loans

There are high hopes that 2025 will bring a rebound in M&A. But it’s going to take time for deals to filter through, especially with uncertainty around tariffs and a blitz of executive orders taking shape in the early days of the new administration.

"Most folks I've been speaking to are saying the pipeline's bigger than it's ever been, but it's a timing question," said R. Jake Mincemoyer, a leveraged finance attorney at A&O Shearman. "And while we're putting politics aside to be happy about the election results from a dealmaking atmosphere, we've got to give this a few months or a quarter or two to see what's actually going to happen.”

In the meantime there’s huge demand for any deals that do need to get funded, especially on the loan side.

Concrete company Quikrete is wrapping one of the largest debt financing packages of the last five years, with a $9.2bn deal across bonds and loans to fund its acquisition of building materials peer Summit Materials. Pricing on the $3.95bn bond portion has been tightened from talk, while the loan has been upsized to $3.95bn.

Similarly, Stonepeak’s $1.4bn loan financing for its acquisition of Air Transport Services Group was accelerated by two days to 3 February, with investors latching onto tailwinds in air freight thanks to strong consumer spending and demand for leased aircraft services in light of Boeing’s production issues. Leads may ultimately decide to upsize the loan instead of bringing a $500m secured bond that was initially planned, according to sources close to the deal.

DIRECTV — still eyeing DISH?

TPG’s $2bn debt package to fund its takeover of DIRECTV from AT&T faces some skepticism from investors concerned about the declining subscriber numbers at the pay-TV provider. However, the company is offering yields of 9%-10% on the debt, which may be enough to entice investors to stick it out with the melting ice cube company.

The $825m debt package behind Advent International’s take-private of Sauer Brands, the company behind Duke’s Mayo, is also coming at fairly tight levels around S+375bps relative to other single-B rated food LBOs such as Rise Baking (500bps) and Golden State Foods (425bps) last October. Commitments are also due 3 February.

GFL Environmental is also nearing the finish line with a debt package to fund its $8bn carve-out by Apollo and BC Partners. Pricing on the single-B rated, $3bn TLB due 2032 is being talked at just 275bps-300bps with a 99.5 OID, putting it among the tightest LBO new issue prints in recent years, according to 9fin data.

“It’s a good time to have new money deals,” said one levfin banker. “There are too many repricings.”

On the move

Medical Properties Trust bonds traded up this week after the troubled hospital REIT announced and then printed $2.5bn equivalent in new secured notes that will help pay down its near-term maturities.

Surgery Partners bonds dipped several points meanwhile after Bain Capital offered to acquire the remaining shares in the surgery facility company that it does not already own. The company’s Caa1/CCC+ rated 7.25% SUNs due 2032 dipped from 102.7 to 98.9 before climbing back to 99.96.

Merlin Entertainment disclosed to lenders that the recent wildfires in Southern California had a “direct impact” on one of its attractions, as it priced $410m of seven-year senior secured notes via Deutsche Bank this week to refinance its existing senior secured notes due 2026.

9fin has published a tracker and a podcast unpacking the impact of the wildfires on leveraged credits in the area. Check it out here and here.