US LevFin Wrap — Higher inflation hasn’t deflated a hot debt market yet

William Hoffman
+David Bell
+ 1 more

12 April 2024•8 min read

Higher than expected inflation data prints this week are raising borrowing rates, and yet issuers continue to bring supply that is well received and tightening through price progression.

Whether it’s a triple-C bond or a double-B loan, deals are performing well.

Restaurant Brands International (Ba3/BB) priced a $750m add-on to its TLB due 2030 to fund its planned acquisition of Carrols Restaurant Group, which is the largest Burger King franchisee in the world.

In the same week, investors supported a two-part bond deal from offshore driller Transocean (rated B3/CCC) to fund a tender offer that should lower its overall interest expense. The deal was upsized to $1.8bn from $1.5bn and priced at the tight end of talk.

Even pharmaceutical company Endo managed to raise $2.5bn of exit financing this week to emerge from a bankruptcy that addressed opioid-related liabilities and a heavy debt stack. Yet some investors remain skeptical of the business, as we wrote today.

The enthusiasm is helping banks win some business away from private credit. For example, software company Encora is reportedly sounding out buyers to refinance $600m of private credit loans into new syndicated leveraged loans.

“With the BSL market open right now, this is indeed an option for PE sponsors looking to lower the cost of their debt,” one direct lender said.

But a changing rates environment is threatening to put a damper on the party.

Buzz kill

Deal flow did take a brief pause on Wednesday when consumer price index data came in higher than predicted, prompting a steep widening of average yields.

Supply came back as normal on Thursday, but still, the higher inflation data print lowered expectations to just two Fed rate cuts on the year with the first expected in September, JP Morgan said in a report this week.

That’s quite the come down from expectations earlier this year of four to six rate cuts.

Those changing forecasts sent high yield average bond yields some 20bps wider on the week to 8.18% by Thursday, according to the bank. Nearly all of that widening is driven by Treasury benchmark rates given that high yield spreads are at their lowest level since last November at 342bps over Treasuries.

High yield investors traditionally look at all-in yield, which is still enticing for many at over 8%. But BofA is encouraging investors to consider that these low spreads may not be a good entry point on a risk-adjusted basis.

“What matters to long-term performance, are the basis points of credit risk against the basis points of credit spread,” Oleg Melentyev, credit strategist at BofA Global Research, said in a research note. “Based on this, today's credit market value proposition remains unexciting.”

Sassy software

These changing rate expectations have big implications for tech and software credits looking to refinance expensive debt.

Concerns in the software sector peaked towards the end of last year with high rates putting pressure on cashflows. Deals started to return on the expectation that rates would decline this year, but that has not played out for issuers so far.

Swiss information technology company Veeam Software priced a $2bn TLB due 2031 that will refinance its existing TLB and a PIK note. The company was able to upsize the deal slightly from $1.96bn, and tighten the pricing to S+325bps with an OID of 99.75 in from initial talk of S+350bps at 99.5.

However, the refinancing is expected to moderately increase cash interest payments, S&P noted in a report this week. Those rising costs could challenge other software credits.

“With the prospect of rates moving south, tech is becoming more attractive,” one sell-side advisor said. “But if the message is that rates are going to stay elevated for longer then I think the higher growth technology names will be more challenged.”

That’s a concern some buysiders have with the biggest and most complicated software name in the market this week — Broadcom EUC.

UBS is leading a $2.6bn seven-year term loan to fund KKR’s $4bn carve out of Broadcom’s end-user computing (EUC) unit. Broadcom inherited the unit when it bought VMware for $69bn last year, which makes it difficult for prospective investors to determine what stand-alone financials will be, as 9fin reported this week.

Others in the space this week include food service supply chain software provider Buyers Edge, which launched a $550m TLB due 2031 that will refinance debt and pay a distribution to its owners.

Legal software company Dye & Durham also priced a $350m TLB due 2031 at S+425bps with a 98.5 OID and $550m SSNs due 2029 at 8.625%.

M&A moves

Higher for longer rates could discourage some M&A deals, and yet more are coming into the pipeline.

For example, Formula One owner Liberty One is holding early discussions with investors about how it will fund its acquisition of MotoGP rights holder Dorna Sports. At the center of those discussions is a debate about how collateral will be used, as we wrote this week.

Bankers are giving an early sense of the potential pricing for a loan portion of an $8.5bn debt package backing Silver Lake’s acquisition of sports and entertainment business Endeavor, which is unlikely to be syndicated before Q4.

Elsewhere, Blackstone agreed to take REIT AIR Communities private in a $10bn deal that is expected to bring new supply to the leveraged debt markets.

To the extent there is M&A activity this year, it could be somewhat front-loaded as markets start to look ahead to the presidential election and what it could mean for corporate debt.

“Very little is priced in in terms of election risk,” said Meghan Robson, head of US credit strategy at BNP Paribas. “So far, the primary risk US investors have been watching is more on the inflation front and cost of capital for corporates, but we expect that to change as we get closer to the election.”

What we’re writing

Staples is looking to take advantage of some relatively stable performance in recent quarters to refi upcoming debt. The office supplies company is working with bankers at JP Morgan and Morgan Stanley to gauge investor interest.
Lenders to Sound Inpatient Physicians have extended a co-op agreement to 2 June as the company continues to explore options for raising capital, according to 9fin sources. The agreement was initially set to expire on 2 April, the sources said.
Morgan Stanley hired a new head of US loan trading from RBC.
Private jet subscription company VistaJet released fourth quarter and year-end earnings this week while its founder railed against ‘malicious representations’ and announces legal actions.
To better stay up to date on the companies you follow, 9fin launched its new SEC filings alerts tool this week. Check out our explainer on how to use it here.