US LevFin Wrap — Market shakes off politics as M&A, LBO activity pick up

William Hoffman
+Dan Mika

11 October 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.

All year, market participants have warned of a slowdown in supply ahead of the US presidential election, which is now less than a month away. But supply remains high as several borrowers look to fund acquisitions and leveraged buyouts — even amid the increasing market uncertainty.

This week, Cleveland-Cliffs priced $1.8bn in a two-part bond package for one of the largest bond acquisition deals of the year to fund the steelmaker’s $2.5bn takeover of Canadian competitor Stelco.

Likewise, in the loan market, IG-rated Carrier Global spun off its commercial and residential fire business Kidde into a low single-B rated company. Sponsor Lone Star Funds is buying Kidde and raised $1.835bn in a debut loan deal this week, which is one of the 10 largest LBOs of the year, according to 9fin data.

No word on whether investors were influenced by Falcons quarterback Kirk Cousins’ involvement with the brand, or Kidde’s fire safety songs.

Quarterback Kirk Cousins works with Kidde on a 2023 advocacy campaign (via Kidde)

Borrowers remain active in the market not only because spreads remain incredibly low, but also because the political landscape has proved less disruptive than people previously thought, sources said. It’s just “faux volatility”, as one fixed income strategist described it.

“We'll find out who the next president is, but tell me who's going to control Congress,” the strategist said. “In terms of significant or major legislation that could move the needle, you need to have either a red wave or a blue wave to occur. And from the looks of polling it doesn’t look like you’re going to get that one way or another.”

Perhaps that’s providing some extra confidence to get deals done this month as opposed to waiting for an election outcome, sources said.

For example, sponsors funded leveraged buyouts of grain storage company Agco Grain & Protein, food service provider Golden State Foods, and cloud technology company JAGGAER this week. The food processing machinery company JBT also priced a $900m TLB to fund its acquisition of competitor Marel. And Rise Baking Company kicked off the sale of $1.3bn across loans and bonds to back a buyout by Platinum Equity.

Even lesser-known sponsor 26North came to market to fund its debut LBO for electrical contractor ArchKey Solutions. However, that first-timer status may have led the sponsor to pay up for the $650m term loan B due 2031 that priced at SOFR+475bps with a 99 OID.

Of course, such deals are planned out months in advance. But investors say a potentially changing political environment is already encouraging some new deal formation.

“There’s some hope the Department of Justice and Federal Trade Commission will be more open to mergers,” one portfolio manager said. “We know there's a lot more deal chatter out there.”

Bonds bounced

Although it was still a strong week of primary issuance, there were some notable cracks.

It started with a better-than-expected jobs report last week, which dampened views that the Federal Reserve might cut rates quickly and aggressively.

We delved into some of the nuances this week highlighting that spreads are widening alongside rising Treasury rates.

In response, the high yield market saw $270m leave the asset class for its biggest outflow in nine weeks largely driven by ETFs, according to a Bank of America research report. By contrast, $1.41bn of funds moved into the loan market for the biggest inflow in five months.

Yields rose this week erasing much of the post Labor Day rally (via ICE BofA data)

But the market is not overreacting just yet. Spreads are still hovering near all-time lows, which encourages borrowers to come to market now and investors still see 7% as an attractive entry point for bonds.

If this jobs report is just a one-off event and the economy does slow at a moderate rate, that would mean more Fed rate cuts that would encourage new issuance, explained Oleg Melentyev, credit strategist at BofA research, in a report today.

But if this jobs report is more of a turning point, rates might not come down as much as previously anticipated, but it would mean a booming economy would prop up companies.

“Time will tell whether payrolls last week were a game changer,” Melentyev wrote. “To us, a no-landing outcome would imply an actual re-acceleration of the economic activity … This scenario is an absolute home-run for leveraged credit.”

Magnetic deal for Berry

Some of these macro-dynamics played out in a deal for newly formed paper products manufacturer Magnera, which upsized its bond tranche while cutting the loans in a $1.58bn debt package this week.

The new issuer is the combination of paper products manufacturer Glatfelter and Berry Global’s divested health, hygiene, and specialties segment.

Glatfelter was largely cast aside by investors who saw a triple-C commodity products company that was consistently missing financial targets. But the merger is injecting new life into the credit.

Ratings were upgraded three notches to B1/B+ at Moody’s and S&P, pro forma adjusted EBITDA quadrupled to $455m for the LTM period ended 29 June from just $100m at Glatfelter alone, and net leverage at the combined entity is nearly half of Glatfelter’s stand-alone leverage at 4.7x pro forma. For more details on the business, check out 9fin’s Credit QuickTake.

“We sold it a long time ago as Glatfelter's business continually underperformed,” one investor said. “Now it looks like we probably should have kept it.”

Citi priced $800m SSNs due 2031 at 7.25%, which was upsized by $300m and landed at the tight end of price talk. The $785m TLB due 2031 was downsized by an equivalent amount and priced at the wide end of price talk with a margin of SOFR+425bps and a 99 OID.

Additionally, Glatfelter’s existing notes — which will remain on Magnera’s balance sheet — have rallied significantly in the secondary. The existing $500m 4.75% SUNs due 2029 were last indicated at a price of around 89 for a yield-to-worst of 7.1%. Those same notes were trading low as 64 for a YTW of more than 13% at the start of the year.

Glatfelter bonds rally this year (via 9fin)

Secondary situations

US bank earnings kicked off today, which means the bulk of high-yield company third-quarter earnings are still a few weeks away.

Those results will be closely watched by the market.

“The second quarter was pretty strong so we'll see if the third quarter can keep that up,” the investor said. “I think that's probably more important for the market at this point than the amount of new issuance we get.”

In the secondary market, the bottom decile of companies continues to outperform the rest of the space with bond defaults on pace for a two-year low, BofA noted this week. Loan defaults are roughly in line with last year.

Video game developer Roblox is on the opposite end of that spectrum as it was upgraded to Ba1/BB+ in recent months, but its bonds took a hit this week as Hindenburg Research revealed that it is shorting the company’s stock.

Catalent’s bonds also declined slightly this week after Senator Warren sent a letter to the FTC on 9 October urging scrutiny over its planned merger with Novo Holdings as the latter looks to increase its market share of GLP-1 inhibitor drug production.

Some of the other biggest losers on the week included 4-point or more declines from packaging company Ardagh, oil field services company Nine Energy Services, and solar energy company Sunnova Energy.

As of this week, you can track those daily/ weekly price movements and the primary deal flow through 9fin’s US Morning Coffee report.