US LevFin Wrap — Rate cuts are a home run for bond supply, will M&A come out in relief for loan investors?

William Hoffman
+Dan Mika

4 October 2024•4 min read

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The books are closed on the busiest month of the year for high yield bonds and now your attention can turn to reviving your winless fantasy football team and rooting your baseball team to the World Series (congrats on an epic win Mets fans).

Nearly $40bn of bonds priced in September, according to 9fin data, as investors flocked to the asset class to lock in relatively high fixed coupons that are only expected to decline in the months to come as the Federal Reserve cuts rates.

Even though the calendar has flipped to a historically less busy fourth quarter (especially in an election year) demand is still outsized for new money deals and bonds with duration.

Six of the 10 bonds that priced this week held tenors of 8 years or longer including a somewhat rare 10-year bond from Hilcorp Energy, according to 9fin data.

Furthermore, bond deals for vehicle glass repair company Belron and crane manufacturer Terex garnered large order books for their bonds that were 5x or more oversubscribed.

“People are pretty bullish, surprisingly so,” one portfolio manager said. “The Fed cutting rates is usually not a good sign for the economy or credit, but that's a 2025 story at worst, so stay bullish for now.”

Both deals also led the loan market where Belron’s recapitalization deal included $6.7bn of US dollar and Euro loans while Terex raised $1.25bn of loans to fund its acquisition of Environmental Solutions Group.

Loan issuance was strong in September with $95bn priced for the fifth busiest month of the year. But some investors noted that refinancing fatigue is setting in and that more M&A deals would be a welcome reprieve from all the repricings.

“The market can’t eat up a lot more than this,” one buyside anayst said. “You’ve got to see some give at some point.”

M&A monitor

More M&A is on the way with at least 10 confirmed deals coming in the near-term and many more expected as well as potential debt financings that could also hit the market, according to 9fin’s US LevFin Pipeline.

That includes leveraged buyouts of gaming companies Bally’s and IGT Gaming, court approval for Cleveland Cliff’sacquisition of Stelco, and the take private of healthcare revenue management company R1 RCM.

Sponsors TowerBrook and CD&R are taking R1 RCM private in an $8.9bn deal that is expected to be funded with a $4.1bn first lien term loan in the coming weeks, sources told 9fin this week.

When OpenAI announced that it secured a $4bn revolver with a group of banks led by JP Morgan, there was some speculation that the quickly rising artificial intelligence company might look to term out debt.

However, sources familiar with the situation said it's more of a relationship play knowing that further down the line the company will almost assuredly need debt financing of sorts.

“There will be plenty of fees for the banks in the future and AI has hype behind it right now,” the portfolio manager said.

For now, the macro environment is constructive for further M&A. As evidence, the bottom decile of the HY index was the worst-performing segment in the first half of the year but is now 140bps ahead of the index, according to a note from BofA Research.

But that may not continue for long unless the economy re-accelerates from here, BofA’s Oleg Melentyev wrote in the report.

“Both other paths — a soft landing with modest cuts or a harder landing with deeper cuts — lead to underperformance given the fundamentally challenged balance sheets in this area," Melentyev wrote.

Secondary performance stagnates

Despite the strong demand for bonds this week, secondary performance hasn’t been as good.

More than half of the issuers this week traded flat to down this week and only three were clearly in the green this morning ahead of a surprisingly positive employment report, according to a note from investment management firm R. Seelaus.

Some of the week’s biggest secondary activity centered around the various names involved in DIRECTV’s proposed acquisition of EchoStar’s pay TV business DISH DBS.

DIRECTV’s most active notes fell by four points to a price of around 98 while bonds for DISH Network (the 5G wireless business that will remain after the sale of the pay TV division) rose by a couple of points to around 104. Likewise, EchoStar’s Hughes Network Systems was one of the biggest gainers on the week moving four points higher to trade around 93.

Some creditors are fighting back against the terms of the proposed debt exchanges and new money injection that would ultimately fuel the acquisition and there are concerns that regulators might block such a combination over anti-trust concerns.

We attempt to guide you through all the complexity in this week’s episode of Cloud 9fin, check it out here.