LevFin wrap

Covenants plunge into Ahlstrom maelstrom as PPC says goodnight to lignite

By Huw Simpson (huw@9fin.com) and Laura Thompson (laura@9fin.com)

Market conditions remain benign as bond and loan issuers crowd to reprice and refinance existing debt via several opportunistic offerings. On the new money front, M&A is set to pick up in 2021, after a strong finish in the second half in 2020. Indeed some issuers are now happy to flex their muscles, pushing the envelope on new documentation. 

High Yield Primary

Back to the Printers?

As outlined last week, Ahlstrom-Munksjo arrived at the printers on time with its seven-year €650m (equiv.) Senior Secured bond leg, launched Monday. Split into €400m and $305m, the Notes quickly came under fire for very aggressive legals - highlighted in full in our Legals QuickTake (and explored below). IPTs on the deal were sent out at 4.00-4.25% and 5.00-5.25% for the Euro and Dollar offerings. On Friday, last minute shuffling saw the Euro tranche decreased by €50m (with an equal increase to the €TLB), as final price talk set at 3.625% and 4.875% respectively. 

The precedent for the Notes was ThyssenKrupp Elevators and like that deal, the Notes contained a slew of sponsor friendly covenants - which included significant dividend flexibility, the ability to pay subordinated debt via RP, and the ability to make Restricted or Permitted Payments / Investments with Asset Sale proceeds.

Particularly eye-catching were two novel concepts for the bond market - a “Relevant RP Ratio Test” and an “Available Amount”. The former includes a leverage test for restricted payments - which in itself is not unusual in a sponsor deal. However, when a €300m Pref Instrument is removed the leverage thresholds are replaced with a much looser interest coverage test using 2.0x FCCR. This is aggressive, and off market. The second concept, that of an “Available Amount” is borrowed from the leveraged loan market and effectively allows the company to use debt capacity as Permitted Investments capacity.

Staying with paper, the South African pulper Sappi made a second - and more successful - run at HY, this time with €350m in Senior Notes due 2028 (Ba2/BB-). Proceeds will refinance the 2023s, moving the maturity out significantly further than May last year's aborted 2025s. The offering even sucked in a €50m upsize, which will be used to bolster liquidity. Pricing on Wednesday, IPTs in the 4% area whittled down through price talk and revised guidance to land at 3.625%.

Structurally, the paper pulp industry faces a high fixed cost base that makes profitability very sensitive to changes in volume and price. Hit by declining prices for its paper pulp, a weaker Renminbi and demand pull back from Covid, fiscal 2020 was a tough year for the group. The outlook is now stronger however, with a reversal in these trends and pulp prices recovering to $726/ton by the end of December 2020.

As highlighted in our Covid waivers and amendments, Sappi’s RCF covenants were waived until September 2021 with the first measurement due at the end of December 2021. By then the group presumably hopes recovery efforts will have compounded, with the negative effects of Covid rolling out of LTM EBITDA figures. Moody’s appears less constructive in the short term, as credit metrics are expected to remain weak throughout fiscal 2021, although the finalization of the dissolving wood pulp project at Saiccor should provide material EBITDA contributions in fiscal 2022.

Next up, Greek electric power company Public Power Corporation (PPC) proved a hit with the ESG crowd, offering its debut Sustainability-Linked bond on Monday (B/BB-). The €650m Senior Notes due 2026 priced on Thursday at 3.875%, inside IPTs of 4.00-4.25%, and will be used to repay existing debt and for general corporate purposes. 

PPC is the largest supplier of electricity in Greece, with vertically integrated operations providing power to around 6.1m customers, or ~70% of the market (read our full Credit QuickTake here). Legals on the deal had no real surprises, although it’s worth noting that RP and builder and other baskets are subject only to an Event of Default (EoD) blocker. The EoD threshold is set at 30%, rather than the typical 25% (as seen in the previous Notes), and EBITDA add-backs are capped at 20%, subject to an 18-month time limit.

Sustainably Linked bonds are a paler shade of green to their fully fledged cousins, and have no allocations to ‘green’ projects.

Instead, the margin paid on the loan flexes depending on whether the issuer meets certain sustainability targets. Critics rightly point out that companies set their own, usually achievable targets. For PPC, the target is a 40% cut in carbon emissions by December 2022, with a 50 bps uplift to the margin if this is not met.

Second Helpings

For the second time in as many weeks, carpet maker Victoria entered the fray, this time offering €250m in Senior Secured Notes due 2028 (B1/BB-/BB-). The group’s recently issued 2026 SSNs have already performed well, trading up more than a point and a half over the reoffer, even when considering the sizable interest savings locked in over the existing debt stack.

Given that success, management decided to try their luck again, launching the new Notes to refinance the remainder of their 5.25% 2024s. IPTs in the 4% area gave way to price talk in the 3.875% area, with the final coupon landing at the tight end for 3.75%. This represents only a 12.5 bp premium for the extra two years of tenor, and together with February’s issuance will save the group around €7m of interest fees annually.

We’ve previously highlighted the ‘innovative flooring’ producer’s creative largesse - not limited to leadership tips from the former chairman of the PRC, or views on what constitutes ‘too much leverage’ (see the quote below). True to form, the leverage neutralbond was advertised with the netroadshow code ‘Meghan2021’ - leaving one twitter user to muse that bondholders would presumably mark-to-markle their holdings.

“There is no such absolute measure as "too much leverage" and we have been surprised by how simplistic (or 'lazy', if one was being less kind) some commentators' thinking is in respect of leverage: A generic multiple of X times EBITDA is "too high" for a business, Y times, is "ok". That's a bit like saying everyone who weighs 90kg is fat. That might be true of a 1.6m tall pastry chef, it probably isn't true of a 1.9m rugby player.”

Loans Primary

CLOs rival lenders on refis

Demand kept the loans market singing the same tune this week: refinancings, repricings, upsizings, dividend recaps, aggressive margin ratchets – we’ve got it all. Mainly, though, we’ve got the first two. Only three deals mentioned in this week’s wrap do not at least partially refinance or repricing existing debt, leaving a continued dearth of homes for new money – of $29.9bn of institutional loans issued in Western Europe in February, nearly half (49%) were refinancings or repricings, according to Refinitiv data. In the US, just €25.5bn of new money volume was overshadowed by $77bn in refinancing in February.

“The repricings will run on until everything has been repriced to the new market standard – it’ll be like this until summer,” bemoaned one buysider.

CLOs kept apace. February saw a huge leap in resets and refinancings on the CLO side in both Europe and the US (€8.1bn and $22.5bn respectively, says Refinitiv) as investors flocked to floating rate instruments. “What hurts us helps us,” quipped one US CLO arranger.

The high-flyers - B&B add-backs to sidestep negative EBITDA

Some deals bucked the low margin trend this week – unsurprisingly, these were also some of the few deals not refinancing or repricing. B&B Hotels, a French budget hotel chain whose corporate ratings stand, as it were, at Caa1/CCC (Moody’s/S&P), checked out its slim €100m 2026 TLB add on this week at a high E+550 bps and 99.5 OID plus an 18-month non-call period with existing lenders.

One buysider, a previous lender, admitted the margin would be tempting but described the deal as “life support” for the company, putting the firm’s cash burn since the onset of the pandemic as between €10m and €20m a month.

B&B Hotels also negotiated a waiver to allow it to raise this additional debt and to attach it to existing collateral, a second buysider said. They added that B&B adjusted its EBITDA from -€8m to €2m EBITDAC, labelling a portion of fixed costs as exceptional items that it argued normal sales volumes would have absorbed.

Elsewhere, a €207.5m 2028 TLB backing Paris-based AD Educations’ acquisition by Ardians closed 75 bps wider than guidance at E+500 bps and 98.5 OID. Accompanying is a €50m RCF.

Margins - Three steps let’s go

Demand-heavy technicals saw lenders rolling through with some sponsor-friendly covenants. Buysiders particularly complained of increasingly aggressive margin ratchets. “What’s changing is the number of three step-downs getting through,” said one buysider. “Usually, most deals try for three step-downs but that gets squashed. And some of them are getting through at 0.25x turns of leverage [rather than the standard of 0.5x].”

One such deal this week came from Software firm IFS, which is back in the market to refinance, to fund a shareholder pay-out and support acquisitions (EQT-owned IFS funded another €180m dividend recap in October 2019). Both a €520m and $720m facility are offered at L/E+400 bps and 99.50, with an accompanying €67m acquisition facility guided the same. The euro tranche includes three 25 bps step-downs at 0.25x deleveraging and the dollar tranche has two.

Netherlands-based building materials firm BME Group also won three step downs. It upsized its €300m add-on from €228m and tightened pricing on its €920m repricing this week. The original add-on funds a shareholder pay-out, while the increase will direct €22m to general corporate purposes and €50m to repay an existing TLA. The ratchet is as follows:

  • If leverage is below 4.0x: 375-400 bps

  • If leverage is between 4.0x-4.5x: 400-425 bps

  • If leverage exceeds 4.5x: 425-450 bps

Meanwhile, French Insurer April is already making use of margin step-down. The firm finalised a €553.8m 2026 TLB (B2/B/B, Moody’s/S&P/Fitch) repricing at E+375 bps and par down from E+425 bps – low leverage, however, means the loan starts paying E+325 bps, ratcheting back up by 50 bps if leverage increases.

Aggreko aggressive on loan terms

TDR Capital and I Squared Capital’s buyout of British equipment rental group Aggreko is backed with a medley of £2.5bn loan financing. A 9fin Legal Quick Take based on publicly available terms highlights some queasy terms for lenders. EBITDA add-backs include revenue decline due to Covid capped at 10% of consolidated EBITDA, as well as cost savings that could be reasonably expected in the next 24 months - this time uncapped.

“Saying you’re going to add back 10% of EBITDA based on Covid losses is like saying you’re just going to add back 10% of EBITDA,” said one buysider. “EBITDA add backs are the first thing we look for and particularly now for tries for Covid add backs.” For Aggreko, FY revenue declined €248m from FY 2019 to FY 2020.

The bridge financing includes a rash of currency switches. A £700m senior secured TL due 2026 is to be redenominated into US dollars and is guided at L+450 bps. A total of £1bn of one-year senior secured bridge loans – £500m each to be redenominated into euros and US dollars – pay E/L+450 bps with a 0.5% floor. Margins here step-up 50 bps every three months to caps of 625 bps and 700 bps respectively before September 30, 2021 and, after that, to caps of 650 bps and 725bps.

A £350m one-year bridge loan at L+650 bps – also to be put into dollars – steps up 50 bps every three months to a max of 925 bps before September 30, 2021 and then to 950 bps. Rounding this buffet off is a £300m 4.5-year multicurrency RCF and a £150m guarantee facility, both at L+400 bps, with four 25 bps step-downs at 0.5x deleveraging.

Garrett Motion steers wide on £1.25bn TL

US auto tech business Garrett Motion is set to close its £1.25bn TLB (Ba2, Moody’s) up from a combined minimum of $600m-equivalent euro and dollar tranches. Funds will partly refinance $200m in DIP financing ahead of a March 31, 2021 maturity. A €300m revolving credit facility tops up the funding.  

The $715m 2028 tranche will price at L+325 bps and a €450m 2028 tranche at E+350 bps – both at the wide end of guidance. A 25 bps margin step-up clocks in if Garrett does not get ratings from two ratings agencies by closing.

One buysider, who passed on the transaction and described the credit as “too messy”, was unsurprised that the loan was priced wide. Garrett Motion filed for US Chapter 11 protection in September 2020, buckling under €3.2bn of liabilities and litigation worries with former owner Honeywell. The DIP funds, a senior secured TL led by Citigroup, paid L+450 bps with a 98 OID and 1% floor – upping to L+550 bps if the maturity creeps past March. A maximum of $250m was allowed and up to three separate one-month extensions are available. Catch a 9fin Credit QT here and request a Legal QT here.

This week’s updates:

  • UK nursery operator Busy Bees raised TLs of €257m and £365.9m (B3/B-, Moody’s/S&P) to refinance existing, mostly sterling, debt. The 2028 euro tranche allocated at E+375 bps and par, while a 2028 sterling tranche priced 100 bps higher at L+475 bps and 99.5 OID. The fund will likely repay two existing £50m TLs set to mature 2022, pushing out upcoming maturities.

  • Ion Corporate Solutions allocated an upsized $2.1bn-equivalent refinancing after a failed $2.21bn attempt last year. The $910m (previously $860m) dollar tranche settled at L+375 bps and 99.75 OID while the €1.01bn (previously €860m) euro tranche settled at E+375 bps and par. The refinancing wipes 50 bps of the corporate’s 2019 $1.75bn-equivalent facility and backs a dividend recap.

  • EG Group’s doubled €610m second-lien LBO package (Caa2, Moody’s) closed at the tighter end of its E+700-725 bps guidance. The overall debt package fuels the acquisition of British supermarket Asda’s forecourts business and German OMV AG by acquisition-hungry EG Group – see 9fin’s Credit QuickTake for details. The loan sits alongside a US$450m 2026 term loan B (B3, Moody’s), which is offered to pay 425bp-450bp over Libor, with a 0.5% floor at 99 OID. 

In new deals:

  • MBCC Group, formerly Skyscraper, is out with a dual-currency repricing and refinancing (B2/B/BB-, Moody’s/S&P/Fitch). The construction products supplier – which makes goods like sealants, grouting, tile adhesives and cement additives – wants to shave up to 100 bps of a €1.1bn TLB. Alongside is a $750m TLB guided at L+375-400 bps with a 0.75% floor and 99 OID. One buysider, who is passing on the deal, was uncomfortable with an expected lag in new projects starting up, although projects that were already underway when the pandemic hit have muddled along relatively unscathed. “When you’re looking at a business whose fundamentals are deteriorating and it’s still going to reprice 75 bps down – that’s a comment on the state of the market,” the buysider opined. Lone Star bought MBCC in a carve out from BASF in December 2019.

  • THOR Industries, which manufactures recreational vehicles, is hammering out details of a $924m and €503m TLB (Ba3/, Moody’s). Both are tabled at E/L+300-325 bps and 99-875-100 OID.

  • Team.blue, a domain name provider, is in the market with a €825m 2028 loan guiding at E+400-425 bps, alongside a €50m delayed draw facility. Funds provide a dividend recap for HG Capital.

  • German sanitary service provider Adco Group is guiding its €565m TLB repricing at a clean market average of E+350-375 bps and par.

  • Swiss-based energy sales and trading group MET Group is refinancing a €50m loan launched in May 2018 with a new €120m 2024 TL. The facility includes an accordian up to €150m. This follows a €915m revolver last month with a group of 16 banks to refinance short-term facilities. That financing comprised a €592.5m secured tranche and a €322.5m unsecured tranche with 364-day maturities and evergreen extension options.

  • Information management software company Veritas launched a repricing of a dual-currency 2025 loan (B2/B, Moody’s/S&P) split between a $1.322bn tranche and a €549m tranche. Both are aiming to delete 50 bps from their margins to E/L+500 bps.

  • French real estate firm Foncia is out with a €1.275bn TLB to back a €475m shareholder dividend and refinance existing senior credit facilities. The Partners Group-owned firm is also raising €400m of senior secured debt and €250 of junior unsecured debt. One buysider described the firm as largely sheltered from Covid as it manages groups of properties on a contract basis with recurring revenues. Despite being cash generative, it also won government support – “so this is one I’m definitely comfortable with.”

  • French hospital group Almaviva is looking to refinance existing debt with a new €290m 2028 covenant-lite TLB.

  • Germany’s Wittur, which manufacturers lift parts, closed up a slim €35m 2026 add-on at E+450 bps.

  • Portugal’s agrochemical firm Rovensa is trying to reprice its €520m 2027 TLB down from E+450 bps to E+375-400 bps and 99.875 OID. 

High Yield - Secondary

Secondary traded flat on the week, with overall gains and losses cancelling each other out (43% +0.46 pts | 54% -0.36%). Industrials tracked the largest return (+0.29 pts), with Financials (+0.22 pts) making the only other real progress. On the reverse, Communication Services (-0.17 pts), IT (-0.17 pts), and Healthcare (-0.21 pts) saw small slides.

In single name moves, Kloeckner Pentaplast saw its newly issued 2026 SSNs (-1.8 pts) and SUNs (-4.0 pts) trade down markedly, with this week's respective bids seen as low as 97.4 and 93.0 on Thursday. Arguments from the shorts include the recent deal’s marketing on peak earnings, potential margin squeezes from inflation on input costs, and valuation coverage on the SUNs.

Indeed, several of this year’s issuances are trading sub par. Adler Group’s long tenored SUNs were quoted on Thursday at around 95, Iceland’s SSNs just below 98, and Autostrade Italia SUNs down to 98 (down -3 pts this week).

Finally, the iTraxx Europe Crossover was quoted at 243 bps on Friday, inside the 257 bps level seen last week. In fund flows, HY credit funds saw further outflows for  Global HY (-$75m) and US HY  (-$339m), while Euro HY regained some of last weeks (-$274m) outflow, up $106m. 

Loans Secondary - Steady seas

As in HY, another stale week in overall secondary movements on the loans front. The largest on the euro side by industry was Energy at +0.3 pts, the largest dip from Communication Services at -0.06 pts. In the US, both Consumer Discretionary and Communication Services trended up the most at +0.2 pts. Unlike in Europe, only one US industry dipped: Energy at -0.16 pts.

Kloeckner Pentaplast’s recent €600m E+475 bps 2026 TLB led the pack of downward movement (-1.3 pts to 98.406) to match the HY dips described above. On the opposite end of the spectrum, France’s engineering business Assystem Technologies’s€494.4m E+425 bps 2024 TLB (+2.0 pts to 96.625) and French mobile home holidays firm European Camping Group’s$210.9m L+475 bps 2024 (+1.8 pts to 85.750) saw the biggest bumps to pricing.