LevFin Wrap

High Yield Luft-off For Fallen Angel

By Huw Simpson | huw@9fin.com

Only two new deals were on special offer this week, as third quarter earnings rushed in and US crossover credits held their appetite for Thanksgiving. Despite predictably poor earnings - albeit with some standout names - a bullish secondary market continued its upward trend.

United Gobbles up Third Helping

United Group - the acquisitive EEA Telecom provider - hit the wires early on Monday, announcing €350m in new Senior Secured Notes due 2027 (B2/B). IPTs in the low 4s settled at 4% area, before upsizing by €50m and landing on guidance. Proceeds from the offering will pay down €148m in RCF drawings, alongside certain committed amounts in connection with Forthnet, the Greek Telecommunications firm. 

Since its acquisition  by BC Partners in Mar-2019 the firm has been on an M&A spree - scooping up Croatian and Bulgarian competitors Tele2 and Vivacom. Pro forma run-rated revenues for 30-Sep are now almost at €1,700m.

Luft-off

Downgraded by S&P to BB- on 19-Nov (outlook negative), Lufthansa’s first deal as a fallen angel was quick out the Gates on Monday, offering benchmark size EURs under its MTN programme. Effectively a leveraged bet on the vaccine - the group is still attracting demand from IG accounts, and the book quickly built to north of €4bn. 

The ‘reach for yield’ trend has continued to increase demand for HY issuance of late, as underperforming IG and Government debt pushes investors down the credit ladder. Successive rounds of tightening brought the final yield down to just 3.125% (3% coupon with OID), well inside IPT of 3.75-3.875%, and the order upsized from €750m to €1bn of Senior Notes due 2026 (Ba2/BB-). 

Traffic Still Waffe Thin 

Cost control measures helped reduce monthly cash drain in Q3 by 60% to €206m, from €520m in Q2. Labour negotiations have progressed, with the YoY employee count already down by ~14,000. However, S&P reports that cost cutting measures will only partly offset passenger air traffic declines of 80% in 2020 amid significant redundancy payments. With traffic in 2021 expected to be just 55% of 2019, it’s set to be a long haul recovery for airlines.

Secondary

Topping off steady gains throughout November, Secondary tracked an average gain of 0.62 pts for the week (77% +0.92 pts| 22% -0.37 pts). Energy led the charge, notching up a 2.20 pts gain on the week, with Industrials (+1.15 pts) and Consumer Discretionary (+0.64 pts) also big winners. Smaller gains from areas already performing well (Consumer Staples +0.24 pts, Utilities +0.15 pts, Healthcare +0.06 pts) helped drive convergence across industries.

As we approach the end of an unusually abnormal November, it’s worth briefly looking back at price movements. Broadly, the average instrument has traded up by over three points since the beginning of the month, from 96.7 to 100.1. Viable vaccine news from our friends in the pharma industry gave comfort to both cyclical industries and credits. This in turn led to the aforementioned convergence, from around 14 pts to 7.6 pts as of yesterday (26-Nov).

If we strip the Industry variance and look across all European HY names the picture clears. Where we can attribute positive moves from the vaccine news, instruments traded up on the 9th by an average of 0.6% (Pfizer-BioNTech - the largest single day move this month), followed by 0.3% (Moderna) and 0.3% (AstraZeneca).

Spreads continued to tighten, with the 5Y iTraxx Crossover hitting 266 bps today; the index was quoted at 283 bps last Friday, and 296 bps the week before. Fund flows into EHY were $869m equivalent this week (an increase of 3.3% of AUM YTD), according to BofA and EPFR Global. HY ETFs saw $158m inflow, up 12.2% YTD.

Earnings

This week we produced new earnings flashes on more than 40 third quarter results announcements. It won’t shock readers to hear of an average YoY fall for Sales of -4.2%, and EBITDA -8.0% (average leverage increased ~0.1x on prior period). 

Among single names, Hurtigruten had the worst of it, logging sales declines of 70% versus 2019. The Nordic cruiser was joined by two other hard up names - McLaren (-£11.3m) and Lecta (-€3.1m) - in reporting negative EBITDA for the quarter (-€3.5m).

At the upper end, two French retailers saw welcome gains. Lockdown home improvement helped BUT announce a 29% YoY sales increase, with an EBITDA  spike of 109%. Likewise, luxury goods company Isabel Marant announced a 27% YoY sales increase, with EBITDA up a matching 28%. The accompanying presentation notes that the diversified business model proved resilient to the pandemic, with their ‘dynamic’ casual line partially offsetting lower demand for the ‘more sophisticated’ women's ready-to-wear line.