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Crypto hit an all-time high. The CLO machine is roaring. Companies are crawling out of the woodwork to try refinancing deals that weren’t possible six months ago. Even Xsupposedly had some kind of talks with its bank lenders recently.
Say what you will about the lack of genuine new money supply and leveraged buyout activity, but it’s hard to deny 2024 is shaping up way better for leveraged credit than people expected a few months ago. At least for now.
Some buysiders are even starting to joke about being too busy.
“People are full up with deals,” said one CLO manager. “More refis and resets for CLOs, more repricings for loans, the Vegas and Miami conferences. It’s the first week in March and everyone’s exhausted.”
Historically, that kind of attitude doesn’t get you very far in credit markets. Just ask Marc Rowan, whose idea of a dream day in Japan involves safe yield, total returns and a “fabulous” reinsurance market in need of capital. Always be closing!
Alternative asset manager Rithm Capital rode this wave of seemingly relentless momentum in leveraged credit markets to print its first bond deal in almost four years this week.
The deal will fund a partial tender offer for its 2025 notes and put cash on the balance sheet as the company broadens its credit portfolio beyond its core mortgage origination and servicing businesses.
Sure, the new notes traded down a couple points on the break and are still trading around a point below the 98.98 reoffer price, but the steady grind tighter in credit spreads brought the asset manager off the sidelines to do its first deal after a string of acquisitions, and it’s not alone in wanting to tap eager pockets of capital.
In February, new money supply rose to its highest level since September, and investors are supporting deals at begrudgingly tight levels as spreads continue to compress.
“Everything is pricing relatively tight,” said a high yield investor. “Banks are trying to win the next business and there’s a lot of demand so they’re making sure to price as tight as possible instead of keeping everyone happy.”
One company that’s on the radar for new supply is furniture maker Polywood — 9fin reported this week that the company is close to inking a $1bn buyout deal with a financial sponsor. Arsenal Capital Partners is among the remaining active bidders for the business, but talks are ongoing and it could be another month before a sale is finalized.
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Perhaps the most bullish sign of appetite is the strong response to a roughly $8bn debt package supporting the buyout of Truist Insurance, which contains a huge $1.9bn second lien loan. Demand has been strong for the tranche, teeing up the expected syndication of a $4bn first lien loan and $2.1bn secured bond.
But the rally in rates and credit markets has opened up financing possibilities for a wider range of credits, which in itself is fueling optimism.
Private prison operator CoreCivic for example came in from the cold with a $450m senior note after a three-year absence from the high yield market.
Similarly, Russell Investments is said to be close to a deal to refinance its 2025 maturity, according to 9fin sources, after pulling an amend-and-extend deal last March amid the regional banking crisis.
The loan refinancing wave may have cooled a little since January, but the getting is still good for lower rated borrowers such as Fertitta Entertainment (rated B3/B at the corporate level), which was still able to shave 25bps from its loan coupon thanks to resilient regional demand for its hotels and casinos.
Cinven and Advent-backed elevator business Thyssenkrupp Elevator is also taking advantage of conditions to bring an opportunistic refinancing of more than $3bn of 2027 and 2028 debt across dollars and euros.
Analysts at Bank of America said on Friday that this broadening of market access to riskier names was the most bullish development driving sentiment in credit markets. Yet they cautioned that risk appetite still remains fairly constrained — especially on highly levered names, whose ability to refinance debt might depend somewhat on the timing and pace of rate cuts.
“In a scenario where Fed goes slow and keeps rates higher for longer, prospects for 8x+ levered cap structures are dim,” wrote credit strategist Oleg Melentyev in a research note. “The market senses this and narrows the credit availability window accordingly.”
One area that’s been under pressure in the secondary in recent weeks is broadcasting. As retransmission revenues falter, investors are growing concerned about the ability of highly levered broadcasters to refinance debt as more consumers ditch linear TV.
High rated companies however continue to see strong demand, such as Ba1/BB+ rated United Rentals which priced a $1.1bn 10-year bond deal at 6.125% on Thursday. The bond will finance United’s acquisition of Platinum Equity’s matting company Yak Access, which generated $171m of adjusted EBITDA in 2023.
Iron ore miner Cleveland-Cliffs (Ba2/BB-/BB-) followed through with its goal of creating an all-unsecured debt stack by refinancing its last slug of secured bonds this week, teeing up the company’s cash-rich balance sheet to potentially take another look at US Steel assets if, as Cliffs executives expect, that company’s merger with Nippon Steel falls through.
