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David Bell

Another sluggish week in the primary as secondary loan prices dip

Jumbo WorldPay repricing lined up for next week; Darktrace LBO debt in market

A heatwave may have swept across the US this week but the leveraged finance markets struck a chillier note, as sentiment in the loan market softened on the back of a drop in rates, inflation reads and political headlines in Europe.

We covered several debt syndications in detail, including Copeland, Frontier, NielsenIQ, and Hertz this week, but volumes overall were muted in a holiday-shortened week that saw some secondary softness. Six high yield bonds priced totaling $3.4bn and 16 loans allocated for $17bn, according to 9fin data.

Loan fund flows turned negative for the first time in 26 weeks, according to JP Morgan data, amid signs of a slower economy, moderating inflation, and expanding global rate cuts in Europe and Canada. Loan prices were down around 0.30 cents this week, according to the bank, the largest setback for the index since October. High yield fund inflows have also slowed to negligible amounts in the past two weeks, keeping pace with a quiet HY primary market.

Researchers at BofA said now’s the time to shift into higher quality paper.

“A slow but unmistakable shift from credit risk to rates risk is underway,” they wrote in a client note on Friday.

Retail sales data this week played into the rates theme, with softer than expected consumer spending in the spring. That was backed up by private earnings issued by Apollo-backed arts and crafts retailer Michaels Stores which posted a 3% drop in sales, but higher EBITDA on the back of margin improvements. The company’s bonds were down 3-4 points this week.

Car rental company Hertz offered one of the more eye catching deals of the week, pricing a $750m 12.625% first lien senior secured note due 2029 alongside $250m of 8% exchangeable senior second-lien secured PIK notes due 2029. Banks led by JP Morgan were able to accelerate and upsize the first lien debt from an initial $500m as the company tackles its EV problem, but investors remain cautious on the outlook.

RBC and Barclays meanwhile were able to tighten the pricing on a $1.9bn debt package to fund Blackstone’s purchase of the remaining 40% stake in cooling system carve-out Copeland from former parent Emerson.

Frontier brought a well-received $1.025bn TLB due 2031 to the market via JP Morgan this week, with pricing tightened to SOFR+350bps at 99.5, from S+375bps-400bps at 99. Investors have reacted positively to the fiber company’s efforts to raise more capital with asset-backed securities, which have broadened its funding options.

NielsenIQ showed the repricing trade is still alive by shaving 150bps-175bps off the cost of around $2bn equivalent of 2028 TLB paper due 2031 in dollars and euros (see full pricing details here). Though some investors grumbled about the scale of the repricing, it was also seen as reflective of the company’s single-B ratings.

Cabinet maker MasterBrands provided some new money supply this week, with JP Morgan pricing a $700m SUN due 2032 at par to yield 7%, in from price talk of 7.25%. Proceeds from the loan and new $750m revolver will fund the acquisition of Supreme Cabinetry as well as refinance debt. Investors said the yield looked generous considering its Ba3/BB+ ratings, but the company is also a first time issuer in a sector that’s seen as more cyclical and discretionary than other building products, such as roofing. See our Credit QuickTake and Legal QuickTake on MasterBrands for more.

Other notable deals included loans to fund sizeable dividends for Dutch retailer Action Retail and Canadian cleaning product company KIK Custom Products.

The percentage of loans trading above par has dropped to a three month low of 40%, according to JP Morgan.

But there are still repricing opportunities out there — volumes will be boosted next week by payment company Worldpay, which is looking to shave 50bps from its $5.2bn and €500m TLBs due 2031. The loans were heavily oversubscribed when they came to the market in September to fund its carve-out from FIS by private equity firm GTCR. Commitments are due June 27.

Goldman Sachs is testing appetite for riskier paper to fund Thoma Bravo’s acquisition of cybersecurity Darktrace with a $2.145bn debt package. The deal consists of a $1.685bn TLB due 2031 (rated B2/B-/B+) and $460m second lien term loan due 2032 (Caa2/CCC/CCC+), with commitments due July 2. Investors said they would be digging into the EBITDA add-backs that are a usual feature of software LBOs.

Otherwise, there’s a few encouraging signs of deal-making. Boyd Gaming, for example, has reportedly approached Penn Entertainment over a potential acquisition of the latter, which is valued around $9bn including debt. Advent International found an exit meanwhile for its defense technology company CAES Systems via a $2bn deal with Honeywell.

"Outside of repricing and refinancing, volumes have slowed a lot," said a loan investor. "But the underlying drivers are looking better — it does seem like M&A is starting to be talked about more which should provide some fodder for new issuance.”

Finally, we caught up with Stephanie Rader from Goldman Sachs Alternatives in our 9Questions interview series this week. Hot topics include the increasingly crowded private credit market and opportunities for the firm in Europe and Asia.

Carlyle and KKR vie for Discover’s $10bn portfolio of US student loans (FT)

Elliott and Carlyle square off in $4bn debt dispute over software company (FT)

This judge made Houston the top bankruptcy court. Then he helped his girlfriend cash in. (WSJ)

Plan for new accounting rules on software costs moves forward (WSJ)

Lazard hunts for private-credit acquisition to boost asset management (Bloomberg)

Hildebrand pulls bid for Vista Outdoor ammo unit (WSJ)

Strawberry full moon to light up sky Friday night (Axios)

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