US LevFin Wrap — Moving swiftly on

David Bell
+Sasha Padbidri
+ 1 more

9 August 2024•5 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.

Given the way that primary issuance rebounded and secondary prices retraced this week, it’s fair to say the volatility that hit markets from Sunday evening through Monday has abated, even if investors are not exactly out of the woods yet.

That’s not to downplay how the week started off. The flight to safety move drove Treasury rates down, resulting in leveraged loan funds being hit with record weekly outflows. Sea World, SBA Communications and ION Analytics put loan repricing deals on ice amid the volatility, and average loan prices hit a two-year low before recovering 0.36 points to 96.71, according to JP Morgan.

But overall the loan market was supported in part due to the strength of demand from CLO managers that are desperate for buying opportunities to ramp new CLOs, and the lack of forced selling — apart from some ETF-driven flows.

Similarly, average high yield bond yields have only widened 7bps to 7.78% in August, according to JP Morgan, having recouped some 49% of the 81bps credit spread widening this week alongside a rally in rates. The robust demand as primary issuance returned on Wednesday and Thursday is also an encouraging sign of market appetite.

"Even though bonds and loans were being quoted lower on Monday, it didn’t feel like there were a bunch of forced unwinds, or investors being forced to sell at lower levels,” said Grant Nachman, CEO and CIO at Shorecliff Asset Management. “The proverbial ‘tell’ in our market was probably just how hard it was to find meaningful amounts of supply as dealers took levels lower.”

Understandably, higher quality double B bonds traded better through the volatility versus lower rated credit, but overall analysts at BofA affirmed that credit markets performed reasonably well through this episode, with credit spreads “never widening far beyond fair value”.

“Overall, our take remains that this episode should be treated as a vol shock and not a cyclical turn,” they said in a client note Friday.

Here are some other takeaways:

Energy drove supply rebound

Primary activity rebounded as the week went on, driven firstly by a clutch of deals from the utility and energy sector, which is being perceived as a defensive play by some leveraged credit investors.

Two debt deals for electric power operators Lightning Power and CPV Fairview priced this week, and another electric generator South Field Energy launched a financing on Tuesday despite the stock market turmoil that preceded it. Another three oil and gas names — Ohio Valley Midstream, California Resources and Noble — followed through with bond pricings on Thursday.

On Tuesday, we reported that airline carrier JetBlue was in talks for a potential $2.7bn debt offering, which is yet to emerge. Sources said the bonds are unofficially whispered in the 9.5%-10% region while the loans are similarly whispered in the range of SOFR+525bps-550bps with a 98-98.5 OID. Goldman Sachs is leading the bonds while Barclays leads the loans.

High yield supply then broadened on Thursday with a successful $750m debut high yield offering from Walgreens that was well-received after extensive pre-marketing. Kidney dialysis company DaVita raised $1bn, patio and door-maker Jeld-Wen issued $350m and packaging company Post Holdings printed a $1.2bn unsecured note.

Prime Healthcare Services is also moving forward with a $1.5bn debt raise, which we flagged earlier in the week.

"The fact that the primary markets have opened back up so quickly suggest that market participants are open to taking on additional exposure to high yield bonds and leveraged loans,” said Nachman. “[On Thursday] it felt as if there was significant demand for new issue deals."

Global Aircraft Leasing Co (the holding company for Bohai’s stake in global aircraft lessor Avolon Holdings) joined in on Friday with a $1.1bn three-year non-call 1.5 senior secured note. Proceeds from the deal will be used alongside $990m of additional shareholder equity to refinance the 6.50% PIK toggle senior notes due 2024.

Busier than you might have expected on Monday. Chart via 9fin data

Loan activity improved

While some other repricings were postponed, engineering company KBR was able to reprice its $998m TLB due 2031, albeit at the wide end of price talk. It took the spread down to 200bps, 25bps lower than before.

Commercial laundry company Alliance Laundry Systems is nearing the finish line on a $2.075bn TLB due 2031 to refinance debt and pay a distribution to shareholders. Commitments are due Friday after the company, owned by BDT and MSD Partners, moved pricing wider and tightened the credit agreement (see a full list of pricing details and covenant changes here).

Telecom company Midco is said to be getting closer to finalizing its $600m TLB and $500m revolver to refinance existing debt and fund a dividend to its IG-rated owner, Comcast.

Investors tracking that deal said the company is facing increased competition but noted its strong existing footprint and the high barriers to entry in the space.

“It's pretty solid deal,” said a buyside source. “For the most part, I think the company generates sufficient cash to manage the increased leverage on a senior secured basis.”

Auto repair chain Crash Champions added to the pipeline with a $150m tap of its SOFR+475bps 2029 TLB on Friday. The tap is talked at 96.75-97.00, offering around two points of premium over the existing loan. Commitments are due 13 August.

Broadly, the positive momentum on some of these off-the-run deals this week is being taken as an encouraging sign. In addition, some investors are welcoming the likely slowdown in loan repricing activity, now that a much lower proportion of the loan market — just above 25%, according to JPM — is now trading above par.

“I think the rest of the month, we’ll be slower on the new issue front,” said a CLO manager. “But that doesn’t mean we’re not busy with other things — earnings, trading tied to macro volatility. We’ll be busy from that perspective.”

Lumen had a week to remember

On that note, there were some standouts in the secondary market this week.

Lumen was a big winner as its debt rallied six points alongside a stunning stock price increase after the company reported it had generated $5bn of future sales thanks to AI demand. The company also said it is in talks to secure a further $7bn in revenue from future sales over the next 3-4 years.

Gray Television’s bond debt traded down on Thursday meanwhile after the company reported lower than expected second quarter results, particularly in its core advertising segment, which is one of its largest sources of revenue. Our credit team unpacked the earnings report in a separate analysis here.

Sotheby’s senior secured bonds were up 12 points on Friday after it was reported that Abu Dhabi-based sovereign wealth fund ADQ is taking an ownership stake in the Patrick Drahi-owned auction house as part of a $1bn capital injection.

Our latest report on triple-C loans report highlighted the recent downgrades of Naked Juice, more commonly known as the owner of Tropicana drinks, and Cox Media Group, as well as the pressure at Magenta Buyer and Del Monte Foods, the latter of which has struck a deal with an ad hoc group of lenders to raise new money and exchange existing term loan debt into second and third out debt, according to 9fin.

Banks kept on underwriting

Our Cloud 9fin podcast this week looked at the recent increase in leveraged buyout activity, with both committed financing being underwritten and some financing packages — Varsity Brands, Nuvei, US Silica — seeing robust demand from debt investors.

As we unpacked on the pod, it’s unclear how significant the pipeline will get. There are still plenty of headwinds in the economy to traverse and the US election is obviously a big uncertainty. The volatility seen this week only adds to the C-suite considerations over potential M&A.

“If you were a company looking to do M&A now, you might be a little more cautious on the economy and slow down that process,” said the CLO manager. “This also means that deal syndication activity 3-5 months from now could be slower because that’s how long it takes to put those deals together.”

That said, we did see committed financing for M&A announced this week. Among others:

UBS is leading an arranger group to provide debt financing to support S&S Activewear’s acquisition of alphabroder, which is expected to close later this year. S&S is a portfolio company of CD&R
UBS, Citi and RBC are also providing debt financing to support Veritas Capital’s buyout of NCR Voyix’s cloud-based digital banking business for $2.45bn in cash, plus future additional contingent consideration of up to $100m

For more examples, see our LevFin Pipeline here.