US LevFin Wrap — Primary action set to resume after credit spreads rip to post-GFC tights

David Bell
+William Hoffman

8 November 2024•7 min read

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Expect the primary market to ramp up next week with more loan repricings, dividend recaps and private credit-to-BSL deals on the agenda after credit spreads ripped to post-financial crisis lows in the aftermath of the 5 November US election.

The M&A and LBO pipeline is pretty light after banks cleared the decks pre-election, but Veritiv’s underwritten financing for its acquisition of Orora Packaging Solutions is one deal to watch out for, sources said.

Check out our US LevFin Pipeline for more.

The mood is upbeat despite the lack of financing opportunities in the immediate future, as investors latch on to the potential for growth, deregulation and M&A after the Republican party swept the White House, Senate, and potentially also the House of Representatives.

This has driven the ICE BofA HY spread to a post-GFC low of just 274bps over Treasuries, while the percentage of loans trading above par has climbed to a three-month high of 52%, according to JP Morgan analysts on Friday.

“CLO formation feels really good and when you layer on the retail money that’s now coming into loans, there’s a lot of buying power out there,” said a leveraged finance banker. “That leads to a pretty good environment for the loan market.”

HY spreads hit a post-crisis low (via ICE BofA/St Louis Fed)

High school yearbook company Jostens set a strong tone in the primary already, as it set out to fund a dividend for sponsor Platinum Equity in tandem with a $450m minority investment from Koch Equity Development. Pricing tightened on a $450m TLB that launched on Election Day alongside a $500m SSN due 2031, with order books closing today. See our Credit QuickTake for more.

UFC and WWE operator TKO Group announced a $2.75bn Goldman-led refinancing on Wednesday afternoon, with commitments due 14 November. UFC CEO Dana White even spoke during Trump’s acceptance speech in a sign of the company’s close ties to this new administration.

Neptune Retail Group is one of the growing number of companies looking to take advantage of tight credit spreads to refinance private debt in the broadly syndicated market. Jefferies is pre-marketing a $675m loan to take out a Cerberus-led private facility, according to 9fin sources.

General Atlantic and Hg Capital-backed fund administration provider Gen II Fund Services meanwhile tapped UBS to host a lender call on 12 November for a $675m 1L TL to refinance its existing private credit facility.

Hung over

One of the few primary market updates this week was that underwriters led by Deutsche Bank had to take down at least a portion of the financing for 1440 Foods’ acquisition of protein bar brand FitCrunch, which closed this week.

As we highlighted last week, investors raised concerns that 1440 Foods was buying yet another protein bar company at a high valuation multiple when the bar category is already oversaturated. The transaction closed on 1 November after the debt commitment deadline passed on 31 October.

In a similar situation, financial technology firm FNZ struggled to build momentum for a $2.1bn-equivalent multi-currency refinancing of its unitranche debt, with underwriters shifting the structure, including downsizing a euro TLB to $521m equivalent and converting it to a TLA that will be held by relationship banks. Lenders expressed concerns over high leverage, weak cash flow and expansion risk during the marketing process.

On the move

In the absence of primary action a lot of our coverage was focused on secondary moves and earnings season this week.

Private medical product supplier Medline struck a positive note with strong Q3 earnings that keep the company on track for a potential IPO next year, while family-owned Great Outdoors Group beat projections despite a continued downward trend in EBITDA.

Political campaigns and PACs spent billions on ads in the leadup to the election but it was still a tough week for broadcasters. E.W. Scripps bonds traded down 7-10 points on Monday after it said talks fell through with a potential bidder for its Bounce TV network.

Gray Television bonds were also down a couple points on Friday after it reported that revenues are expected to be 11% lower year-over-year in Q4. The lower guidance was due to Hurricanes Helene and Milton disrupting political ad spending as well as ABC winning the broadcast rights for certain SEC college football games over GrayTV’s CBS stations.

Bonds for airplane parts supplier Spirit AeroSystems held steady despite it issuing a going concern warning in its Q3 earnings report. The company released projections expecting a negative free cash flow of between $450m to $500m over the next three quarters, but investors expect the planned merger with Boeing to offer relief.

Election recap

The election results leave a lot to unpack for credit investors in the coming weeks, but we took a stab at outlining some potential impacts for LevFin in this piece on Wednesday.

We also discussed the result in this week’s Cloud9fin podcast — here are links to the episode on Spotify and Apple Podcasts.

The red sweep is potentially positive for certain sectors like defense and energy as well as niche corners of credit such as debt issued by private prison operators like CoreCivic and GEO Group, which have rallied this week alongside their Q3 earnings reports. Meanwhile, sectors such as healthcare, consumer retail and renewable energy are coming under pressure because of concerns around government spending priorities and the impact of tariffs.

It’ll take some time to pull through, but investors are also hopeful for a pick-up in M&A.

“We're probably looking at late Q1 kind of early to mid Q2, before we see a bigger wave of M&A activity in the market,” said a portfolio manager. “But it should definitely be a pretty robust year.”

That being said, the tone for credit markets next year will depend on what the new administration decides to prioritize in January, said BofA analysts on Friday.

“An early focus on prioritizing deregulation and improving government efficiency should be both growth- and budget-friendly without obvious inflationary side-effects, and bullish for credit risk,” they said. “An alternative scenario would be to prioritize lower taxes, new tariffs, and a crackdown on immigration — all of which are potentially inflationary and/or budget-negative. This could lead to substantial bond market volatility, higher rates, and credit-risk negative.”

Loans v bonds

Investors and analysts said that the potential for a slower normalization of rates under a Republican administration is bullish for floating rate loan and structured credit investors.

This potentially marks a shift from recent weeks when investors piled into bond structures while loans softened. While the back-up in Treasury yields seen on Wednesday has since pulled back, investors said there’s less urgency to shift from floating to fixed exposures, despite this week’s 25bps rate cut, because of the new outlook on rates under a Republican economic agenda.

“Both inflation expectations and, in particular, real yields have increased since the Fed began cutting in September,” said Bill Zox, portfolio manager at Brandywine Global. “I don’t think the Fed will cut in December or January, but the Treasury market will have to deliver that message to the Fed rather than the other way around.”

Amanda Lynam, head of macro credit research in the portfolio management group at BlackRock, said that the rate environment supported allocations to loans.

“Because we are not expecting a significant rate cutting cycle, we place more emphasis on the income and carry (yield) components of USD corporate credit total returns, and less emphasis on the potential total return from duration exposure (which would benefit fixed rate bond total returns, mechanically, as rates decline),” she told 9fin via email. “At the index level and when isolating for ratings, leveraged loans offer a meaningful yield ‘pick-up’ vs. HY bonds [which is] attractive from a historical perspective.”