LevFin Wrap

Issa Brothers Pocket the Difference using Supermarket Sterling Baskets

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

Primary - High Yield

The main news of the week was the announcement of Asda’s long awaited buyout by the Issa brothers and TDR. Debt financing for the deal will come via an €840m TLB and - an as yet awaited - £2.75bn dual tranche bond of which just £500m will be unsecured.

The Issa Brothers are no strangers to the outsized benefits offered by aggressive debt funding, using it to build their own forecourt station empire at an astonishing pace. Their old playbook was evident in Asda’s buyout structure. Alongside the debt package, disposals, including the sale of Asda’s forecourt business to EG group (headline EV of £750m), the sale-leaseback of its distribution centers, and Walmarts £500m retained minority stake mean only £780m of cash equity is reportedly to be injected - just 12% of the £6.8bn purchase price

We’ve tracked almost 300 Sterling bonds issued since the turn of the decade, none can compare with the mammoth £2.25bn secured offering expected from Asda. Virgin Media’s 2013 £1.1bn SSNs come a distant second, with Stonegate’s 2020 £950m SSNsin third. 

Looking closer at Sterling issuance in the European High Yield market, 2017 tracked the highest volume we’ve yet seen, and Asda has resolutely planted its green flag in the first quarter of 2021, meaning volumes are already just shy of the previous peak in Q1 2017.

On the supply front, we’ve seen some draw back in recent years, however, Sterling issuance has rebounded sharply from lows in 2019 to probable new record highs.

Traditionally a far smaller market than that for European bonds, the sheer size of Asda’s issue will probe the scale of demand for Sterling paper, however, those investors looking for exposure are in for a treat, and tempered Brexit fears will likely prove a boon to Asda’s defensive double BB offering. It may also tempt traditional sterling money managers north of the English border to bolster low yields available from Investment Grade.

Deals This Week

German airliner Lufthansa hit the thrusters with a punchy dual tranche SUN intra-day offering (Ba2/BB-), pricing €750m four and €850m seven year Notes at 2.875% (OID 99.54) and 3.750% (OID 99.25). Attracting demand from both sides of the aisle, final books were slightly skewed to the longer piece (€1.1bn / €1.5bn) and helped settled terms touchdown 50 bps inside IPTs on each tranche. Proceeds are ticketed for general corporate purposes, and are expected to repay the €1bn state aid KfW loan.

Unrated French telco Iliad had its own short lived odyssey, offering €500m in three and seven year SUNs. Strong books led to successive tightening and a €100m / €200m upsize across the tranches. The short tenor priced with a 0.75% coupon (yield 0.803%) and the longer dated Notes at 1.875% (yield 1.9%). Proceeds will fund the acquisition of Polish operator, Play, whose ‘friendly takeover’ closed near the end of last year.

“DAC’s the way we like it”

Last Thursday, Greek shipping lessor Danaos [NYSE:DAC] announced its intention to offer $300m in Senior Notes due 2028 (Caa1/B) which together with a new $815m senior secured credit facility and $135m sale leaseback arrangement would refinance existing secured debt. The deal launched officially on Wednesday, and priced next day with a juicy 8.500% handle, inside price talk in the 8.75% area.

The group is well known to restructuring fans, both in 2010 and more recently in 2018 where almost $2.2bn was restructured in out of court proceedings, handing lenders almost half of the company. Although container freight rates proved volatile during 2020, idle capacity dropped to 1.2% in December 2020, down from a peak of 12% in June 2020. Shares on the publicly floated group have suffered in recent years, before seeing a return to favour of late. Indeed, the earnings calls seem to have a somewhat casual vibe, with one Senior VP at Jeffries congratulating management on their recent (12-Oct) 31m share repurchase - “DAC’s the way we like it”...

Elsewhere, Rekeep, the ‘complicated’ credit story, returned to clean up with a small €20m fungible tap of its €350m 7.25% Senior Notes due 2026, taking advantage of healthy trading in secondary to price the new issuance at 102.75.

Similarly, debt purchaser Arrow tapped its €285m Senior Secured FRNs due 2026 for a further €75m, this time with a slight discount at 99.0. Proceeds from the private placement will partially repay the group's multi-currency £285m RCF.

And finally, pricing emerged on Kloeckner Pentaplast’s refi parcel. The €400m SSNs tightened from IPTs in the low 5s all the way to 4.25%, the €325m SUNs came in further from IPTs of high 7s, to land at 6.5% on a small €25m downsize, shifted to the TLB. 

Other News

Across the pond, we’ve put together a piece on the US issuance deluge seen since the start of the year, which topped $55bn as of Thursday. The deal count hit 87 new issues, roundly beating the 69 ($43.4bn) seen in 2020.

As we wait for Altice SFR’s upcoming deal, predicted by 9fin, news emerged of Cellnex’slatest acquisition - SFR’s c.10,500 Hivory Towers sites in France, with an initial investment of around €5.2bn, expected to generate Adjusted EBITDA of c.€460m (IFRS 16).

Primary - Leveraged Loans Primary

No easing of pipeline as offerings swell, margins slim down

Rolling into February, it was a quiet week in fresh leveraged loans. Just three were officially issued (BioGroup LCD, Euro Ethnic Foods and NielsenIQ) for a total of €1.98bn-equivalent after seven for a total €6.2bn the week prior (Flender, Knowlton Development Corporation, AlixPartners, Howden, DeltaFiber, Signature Goods).

The pipeline, however, continues to bustle. Asda’s long-awaited €840m five-year TLB came in under market expectations of a plumper €1bn-plus offering and was ultimately overshadowed by the supermarket chain’s blockbuster sterling bond offering as it funnelled some of the anticipated loan offering into its notes (see above). Alongside the E+300 bps €840m TLB at a 99.5 OID, is a fully pre-placed £195m TLA. Buyside sources put Asda’s senior debt leverage at a reasonable 2.3x or 3.0x including finance leases.

At least another €1.4bn was announced for the pipeline this week. Luxembourg-based fund administration provider Alter Domus launched a seven-year €600m-equivalent TLB split between a €400m tranche and a $245m tranche. More modestly, French higher education platform AD Education will launch €260m in loans next week, including a seven-year €200m TLB and a €50m revolving credit facility. Finally, software firm CDK International unveiled a €515m TLB alongside a fully pre-placed £125m second lien TLBto back its acquisition by Francisco Partner. UK fossil fuel firm EnQuest has announced its banks are putting together a Reserve-based Lending (RBL) facility to refinance its existing senior bank debt and fund the acquisition of a stake in a UK North Sea development.

German real estate firm Apleona overshadowed Asda in terms of size this week. It is in the market with a €1.115bn buyout financing, including a €740m seven-year TLB, a €145m 6.5-year Revolver and a €230m six-year guarantee facility. Alongside is a fully pre-placed €100m second lien with a 0% floor,  at E+750-775 bps. The TLB, offered with a 0% floor, will include 101 soft call for six months. Pricing chatter puts the loan at E+350-375 bps with an OID of 99.5. Stay tuned for more on this deal.

Meanwhile, with technicals titled toward demand, ION AnalyticsKloeckner Pentaplastand Nielsen IQ all bumped up their offerings this week. ION Analytics topped up its seven-year TLB, split between $920m and €790m, by 10m of each currency, while Kloeckner Pentaplast upped its TLB offering by €25m to €1.2bn and retail data and services firm NielsenIQ added a privately placed seven-year C$100m in alongside its existing $950m and €650m package.

On a similar note, this week borrowers continued to tighten on pricing amid what buyside sources describe as an “aggressive”, a “crazy”, a “full-throttle” market. Both ION Analytics’ dollar and euro offerings tightened 25 bps to L/E+400 bps with a further 25 bps step down if the financial media/data firm meets 4.75x first lien net leverage. The OID is 99.75 with a 0.5% dollar floor and 0% on the euros, with soft call protection at 101 for six months. Pricing is tighter from last November, when ION pulled the deal, citing market volatility around the US elections. Then, it was guided at L/E+425-450 bps with OID of 99 on the dollar tranche and 98.5 on the euros.

French private hospitals operator Elsan also tightened the OID on its €350m E+350 bps TLB to par from 99.5-99.75. On top of that, it doubled its ESG margin ratchet to +/-15 bps this week – welcome news for buyside and ESG fund sources that last week confessed that most single-digit EST margin ratchets were just green carrots for investors.

With such aggressive pricing in the market, Kloeckner Pentaplast ultimately came in at the wider end of contemporary loans when it finalised margins on its€600m TLB and a$725m TLB at L/E+475 bps. “I’d be raising my eyebrows at deals pricing higher than 400 bps and 450 bps right now,” one portfolio manager said. The €1.2bn five-year dollar and euro loan priced tighter, however, than guidance of L/E+475-500 bps. The OID firmed to 99.0-99.5 on the euros and 99.5 on the dollars, from guidance of 98.5.

Secondary - High Yield

EHY Secondary tightened this week, as instruments traded up an average of +0.50 pts (80% +0.72 pts | 18% -0.44 pts). More than reversing last week's slip, every industry was in the black, with Consumer Discretionary (+0.71 pts), Industrials (+0.55 pts), and Consumer Staples (+0.53 pts) all posting marked gains. By Sector, names most affected by the pandemic, saw the greatest rise, Alcoholic Beverages (+1.95 pts), Gaming (+1.07 pts), Hotels, Resorts & Cruise Liners (+1.02 pts) and Retailing (+1.02 pts).

Inline with positive movement in Secondary, the iTraxx Europe Crossover was quoted at 240 bps on Friday, moving well inside the 271 bps level seen last week.

In fund flows, European domiciled HY credit funds saw further, but limited outflows (-$92m), eclipsed by Global High Yield (-$700m) and US High Yield (-$113m) reversals. EM remains the standout winner, seeing the 30th inflow in the past 31 weeks, gaining an incredible 11.2% of AUM over that period.

Secondary - Leveraged Loans

Iberconsa sails clear, AS Adventure still in the mud

All of this weeks’ loan climbers carry on their ascent from the tail end of 2020. Spanish fishery Iberconsa€300m E+700 bps TLB due 2024 maintained its upwards trend since December, this week catching a +2.0 pts boost, with expansion news (buying €26m into two new ships and leasing a third in January) keeping the firm in calmer waters. Air ventilation manufacturer Flakt Woods Group’sseven-year €300m E+500 bps TLB, meanwhile, has traded up an impressive 5.5-pts to 82.3 since the end of 2020.

Taking the less complimentary title of this week’s biggest downward mover is APCOA Parking. The German full-service parking management company’s €514m E+325 bps TLB due 2024 pulled in at 94.2 at the end of the week, down -2.2 pts from 96.4. 

AS Adventure’s€200m E+500 bps TLB due 2022, however, like last week continues to trade downwards in the low 50s (51.8 down from 53.8). It’s TLB crashed to a low point of 37.5 in September 2020 amid reports the outdoors sports firm was in talks with owner PAI Partners and lenders to restructure its debt – the loan is firmly at distressed levels.