US LevFin Wrap — Windows and doors of opportunity

David Bell
+William Hoffman

22 March 2024•8 min read

Leveraged credit markets are ending the week with some positive momentum on Friday, with drive-by high yield deals from Bombardier and Hilton Worldwide, the expected pricing of the bond portion of Truist Insurance’s LBO financing, and the announcement of a highly anticipated refinancing effort from Herbalife.

The strong end to the week builds on the successful pricing of $2.35bn of acquisition financing for building product company MITER (aka MI Windows and Doors) on Thursday, as a jump in rates abated after Wednesday’s FOMC decision and a surprise rate cut from the Swiss national bank.

Truist Insurance’s financing package for Stone Point and CD&R’s LBO is expected to be wrapped up today, with Morgan Stanley leading a $3bn seven-year non-call three SSN with price talk of 7.25% area.

The bond was upsized by $250m from initial size, with the TLB due 2031 reduced to $3.1bn. Pricing on the loan has been tightened to SOFR+325bps and a 99.75 OID, in from SOFR+325bps+350bps and 99.5. Pricing on a $1.9bn second lien loan was set at SOFR+475bps and par last week, which will close today.

The LBO is one of several being digested by investors at the moment including aerospace parts manufacturer Kaman(being acquired by Arcline) and background screening biz HireRight (taken private by majority shareholders Stone Point and General Atlantic). The lack of this kind of supply has been a bugbear of leveraged credit investors for some time but more is likely on the way thanks to a string of M&A and carve-out deals announced in recent days.

In the past week alone:

Nordstrom debt rallied on reports the company was courting private equity bids
Unilever reportedly started shopping the ice cream unit that includes Ben & Jerry’s to PE buyers
Paramount attracted an $11bn bid from Apollo for its production studio, Paramount Pictures (though the company’s biggest shareholder reportedly prefers other options)
Canadian clothing company Gildan said it was fielding bids for a potential sale, with RBC and Goldman Sachsreportedly advising the company
Alight struck a $1.2bn deal to sell its payroll outsourcing business to HIG

TopGolf Calloway however denied there were any discussions regarding a potential sale of its golfing equipment business, following a media report in Korea. Incidentally, the company shaved 60bps from its $1.24bn TLB this week with a repricing, which will save the company over $7m annually.

An offer that will probably be refused. ‘The Offer’ via Paramount Pictures

Windows of supply

This builds on what has already been a solid start to the year in terms of supply, at least on a gross basis. Leveraged loan issuance of $270bn is the third most active quarter on record, according to JP Morgan, while $74.4bn of high yield issuance so far is the busiest quarter since Q3 21.

Of course, most of this has been refinancing or repricing activity. As BofA noted on Friday, borrowers have slashed the amount of debt coming due in 2024-2026 by $329bn or 40% compared with a year ago.

“This episode represents one of the most aggressive instances of maturity extension in the history of leveraged finance,” wrote BofA credit strategist Oleg Melentyev on Friday.

This has been a positive for credit quality in the high yield market, alongside declining debt to EBITDA ratios and higher cash balances, said Meghan Robson, head of US credit strategy at BNP Paribas.

Interest coverage is still declining however which remains a big concern and could impact whether this refinancing window opens more widely to riskier names. It all depends on the timing of rate cuts, according to Robson.

“The bear case for credit will be if inflation is sticky, and the Fed can't cut rates as planned, then you will start to see some of these lower quality leveraged finance issuers struggle,” she said. “Interest coverage is not strong by any means for those issuers and if you don't get the rate cuts, I think some of those deals will be more up in the air.”

There are plenty of sectors and credits that could benefit from a break, including the struggling electric vehicle sector. We did a deep dive this week on eight companies being buffeted by the turmoil in EVs, thanks to slowing sales, high costs and foreign competition.

Health is…wealth?

Investors have been waiting for Herbalife (B1/B) to address a hefty 2025 maturity wall, and now the company is delivering.

We reported last week that the company was working with Citi to hold meetings with debt investors; on Friday, the bank announced investor calls on Monday to market a new $500m TLB to address the company’s TLB maturity in August 2025, which has around $650m outstanding.

More paper could follow, as the company also said that it’s looking to raise a total of $1.2bn of secured financing and a $400m revolving credit facility to repay its term loan A, term loan B and revolving credit facility, as well as a portion of its 2025 senior notes.

The company’s weak earnings have been in the spotlight, alongside other companies in the health space such as WeightWatchers, as diabetes medications turned celebrity diet drugs such as Ozempic and Wegovy become increasingly popular.

For more on that topic, check out this week’s Cloud 9fin podcast: Who watches the Weight Watchers?

LBO flow

Investors this week had a look at a few LBO financings as well as a large acquisition financing for building products company MITER.

The company gained positive traction among investors thanks to its deleveraging potential, allowing lead arranger and bookrunner RBC to print a $1.654bn TLB due 2031 at SOFR+350bps and a 99.5 OID, and a $700m 6.75% SSN due 2032 at par. Pricing was tightened from talk of 375bps and 99 on the loan and 7% area on the bond.

MITER, which is backed by Koch Equity Development (the principal investment and acquisition arm of Koch Industries), is using a slug of preferred equity alongside the new debt to fund its acquisition of industry peer PGT Innovations. Of the $979m equity injection provided by Koch, around $865m is PIK preferred equity, according to sources.

Other highlights in the primary included an eye-catching refinancing by Mister Car Wash, which is riding a wave of booming expansion and consolidation in the car wash business and burning plenty of cash while it does it.

Despite that and signs that this hot market may be leveling out, investor demand led to the new 2031 loan being upsized to $925m from $901m as well as tighten the pricing twice to launch at par with a 300bps coupon, in from initial talk of 325bps and a 99.5 OID.

Medical product supplier Medline repriced the largest loan in the index at tight levels: the $6.1bn TLB due 2028 was repriced at par with a 275bps coupon, shaving 50bps from the previous level. It also printed a new $1bn 6.25% SSN due 2029 at par, which has climbed about half a point higher on the break.

Russell Investments meanwhile is looking to close out the week by pricing its $1.207bn 2027 TLB amend-and-extend effort. The company attempted to extend its 2025 loans in March last year but postponed the deal amid regional banking chaos; this time, it’s back with a juicier spread and a PIK component to give the business some breathing room as it tackles declining earnings.