US LevFin Wrap — Fed cut stokes triple-C debt, GSM Outdoors in the crosshairs, DISH mulls next moves

David Bell
+Bill Weisbrod
+ 1 more

20 September 2024•7 min read

This is our weekly newsletter on all things US leveraged finance, from the latest trends to in-depth coverage, to people moves. Explore all our market wraps here.

A 50bps Fed rate cut was a Shohei Ohtani sized moonshot for equity and credit markets this week, even if the longer term impact on M&A activity and the health of stressed borrowers is not exactly clear yet.

On Thursday the high yield market posted the biggest daily jump in average prices (+0.36 points) in the past six weeks, according to JP Morgan. Deutsche Bank analysts saw triple-C bond spreads tightening “in overdrive” as investors bet on stressed companies seeing some relief on their interest payments.

HY funds saw big weekly inflows of $1.7bn, JPM said. Interestingly, the loan market only saw moderate outflows of $116m, a big difference compared with the exodus from loan funds seen when the Fed started a rate cutting cycle in July 2019.

Sources said the start of this rate cutting cycle should be bullish for investor demand as money market accounts lose some of their appeal as an easy income generator. It may also fuel demand for capital by allowing sponsors and companies to borrow at lower costs and pay higher prices, which could help get more deals done.

The flip side is that tail risks have now shifted to GDP growth rather than the threat of inflation. How that plays out will determine how receptive the primary market is for riskier deals from struggling companies. For example, reports that Bausch Health was considering another sale process for Bausch + Lomb and had hired Jefferies to pursue a debt refinancing were a big reason why triple-C bonds were rallying this week.

But, as some market participants have pointed out, for companies struggling to refinance expensive debt in this backdrop it’s unlikely there will be a bid this week with rates at 4.75% that wasn’t there at 5.25% last week.

The upshot, according to Meghan Robson, head of US credit strategy at BNP Paribas, is that we’re generally in a “not too hot, not too cold” environment for credit, between the Fed cutting, inflation slowing, and the labor market slowing down but not yet weak. The bank’s base case is for 75bps of rate cuts this year with another 125bps in 2025.

Via 9fin data. (Chart). JP Morgan said monthly HY issuance is at a four-month high, and increased LBO activity has taken net new loan supply to the highest level in the past year

LBOs and energy in focus

Volumes in the primary market slowed compared with last week (around $5bn HY paper priced through Thursday compared with over $10bn last week) but included upsized deals for Madison Safety & Flow and LBO debt priced for Envestnet, Heroux-Devtek, and USALCO.

Acquisition financing for S&S Activewear, and LBO financing for Dragon Buyer (Veritas’ carve-out of the digital banking business of NCR Voyix) and GSM Outdoors are also working their way through the pipeline. See our bond and loan screeners for a full list of everything that’s in market.

Commitments for Platinum Equity’s GSM Outdoors deal are due today. In our preview of the deal, we highlighted the company’s niche as a leading provider of hunting equipment and the expectation that the sponsor will lean more heavily into direct-to-consumer sales and away from third-party retailers.

The energy sector meanwhile continues to attract a strong bid from lenders as power producers build out facilities to meet demand for energy from AI and software companies. This week saw a flurry of deals from borrowers including utility name AlphaGen and oil producer Matador, which we wrote about in more detail.

Software company/Bitcoin investor MicroStrategy also priced a $1bn convertible note to take out its existing $500m 6.125% SSNs due 2028, which will free up around $4bn of Bitcoin that secured those bonds.

Election concerns

Several underwritten M&A deals are still to emerge, such as the expected $4.5bn of debt backing Towerbrook’s buyout of R1 RCM, Lone Star’s $3bn carve-out of Carrier Global’s commercial and residential fire business, and HBC’s deal to acquire Neiman Marcus and merge it with Sak’s Global.

We also note that Platinum Equity and LA-based PE firm Butterfly struck a deal to acquire Rise Baking Companyearlier this week, with BofA tapped to lead debt financing. Platinum is also in talks to acquire packaging company Trivium, according to reports.

Trivium Packaging, currently owned by Ontario Teachers’ Pension Plan Board and Ardagh Group SA (via Trivium newsroom)

Beyond this wave, sources said M&A and LBO formation is not showing signs of taking off in part because of the amount of uncertainty around the election. There are big questions over tariff risks for companies that source goods in China, as well as concerns over policies toward roll-up strategies and consolidation, depending on who’s controlling the DOJ.

On top of that, "the cost of financing is still going to be relatively punitive for some of the LBOs,” said Robson at BNP Paribas. Though fierce competition between BSL and private credit is compressing the typical 75bps-150bps spread on pricing between the two markets, she said.

The number of new deals coming down the pipe has slowed a bit, said a leveraged finance banker this week.

“There was a wave there in August and September that died down,” they said. “I think you’ll see this wave of deals, as there’s a pocket of opportunity now. Then I think you’ll see a pause before election, as uncertainty will take over."

Mixed bag in retail earnings

Private earnings made some waves in the secondary market this week, with Apollo-backed retailer Michaels Stores reporting weak Q2 numbers. EBITDA was down more than 20% as the company’s price cutting strategy impacted margins.

This adds to the slew of negative reports coming from the retail sector after PetSmart and PetCo Healthreported last week.

"Earnings are showing consumers pulling back on spending and looking for value — off-price names are doing well,” said Jason Kennedy, credit analyst at PPM America. “There are definitely concerns that we are heading into what is likely to be a very promotional holiday season. The 'back to school' period is usually an indicator of how the holiday season is going to go and it has been a mixed bag.”

Tropicana debt also dropped in secondary trading this week after the beverage company said full year EBITDA would be flat in 2024 as it feels the squeeze of higher orange prices.

DISH Network bonds surged at the start of the week after reports surfaced late last week that its parent company EchoStar is in the early stages of talks over a potential merger with its only other major satellite TV competitor DirecTV.

The company has been sounding out proposals from third parties to help finance the potential merger, according to 9fin sources. The new funding would be backed by spectrum licenses, they said.

DISH climbs higher (via DISH newsroom)

Downgrade watch

Rating agencies sounded off on risks to Boeing’s credit rating from the impact of staff strikes at the end of last week, though investors so far do not seem overly concerned as steady trading levels in the company’s huge debt stack indicate.

Similarly, broadcasting company E.W. Scripps copped a one notch downgrade at S&P this week but the debt was not significantly impacted. As we reported in July, certain lenders to the company have organized with Davis Polk ahead of more than $1bn of debt coming due in the next three years.

Lastly, some Stericycle bondholders tried to gather support from other lenders to push for better terms in a debt exchange offer from the company’s new prospective owner, IG-rated WM. However, this proved difficult on a short timeline so the exchange is likely to be approved by a majority of lenders at the early deadline of 23 September, according to 9fin sources.