LevFin Wrap - Surprise Injection Aids Heavy Lifting For PureGym Bankers

Our take on this week in the European leveraged finance market

Markets opened up in strength this week, with investors’ heavy lifting aided by news of a viable vaccine in the near term. The quick shift in sentiment gave a booster jab to a couple of credits, allowing eagle-eyed bankers to flip the switch on a raft of Sterling Notes. Expectations of a poor fourth quarter following renewed lockdowns has put pressure on issuers to print now - while the going is good - else wait out a cold winter for Q1 to arrive.

Laying foundations for a busy week, German real estators ADO Properties (Adler) on Monday announced €400m in Senior Notes due 2026, with IPTs in the 3.625% area (BB+). As with the rest of this week's issuance, ADO built on the positive news from Pfizer on its Covid-19 vaccine, with guidance coming in materially tighter (3.25% area), before printing with a 2.75% coupon (books ~€1.8bn) to yield 3%. The Notes will refinance existing short term debt; mostly drawn under a Bridging Facility.

At long last we then saw Pure Gym launch, one of Monday’s four deals making gains on new unexpected Macros. The UK fitness chain has been waiting almost a year to take out its bridge financing for the acquisition of Fitness World. Bankers at long last hit send on the launch of €445m Senior Secured Notes due 2025 (B3), with IPTs in the high 80s. A fixed coupon of 5.5% suggests the deal was ‘maxing out’ on its caps at this level, with only OID flex to determine potential losses for the underwriters (Barclays and Jefferies). In a remarkable turn of luck, the vaccine news led to successive cutting on the OID, with final pricing at 95. In one of the trickiest deals of the year - the existing 6.375% 2025 notes were at one stage trading in the 60s - it’s questionable whether the banks even suffered a loss on the transaction after fees.

Feeling constructive on a recent upgrade to IG from Fitch, opportunistic DIY supplier Travis Perkins was also in-market. Offering £250m in no-grow Senior Notes due Feb-2026 (BB+/BBB-), interest quickly assembled to £1bn, with the final book north of £1.75bn (tight end). As with Drax, proceeds will be initially held for general corporate purposes, meaning a temporary gross leverage bump, pending a redemption of the group’s existing £250m 2021s. IPTs of low 4s gave way to successive tightening, with the final coupon set at 3.75% for par reoffer.

Next out the pipe came Thames Water, bringing another £250m offering, due 2026 (B1/B+). Unusual for an MTN - but typical for asset heavy water utilities - the programme debt was senior secured. The Notes will refinance £175m of 5.875% 2022 notes through a tender offer at 104.5 - after initial talk in the low 5s pricing tightening to 4.625%.

Investor calls on Tuesday heralded a new benchmark MTN offering from British stalwart Marks & Spencer. IPTs came in from the 4.25% area to price the 5.5Y £300m Senior Notes at 3.75% - yielding 3.753% thanks to an initial short coupon (Ba1/BB+). The deal marks the fallen angel’s debut in HY, with proceeds held to tender the upcoming £300m 2021s.

Elsewhere, debt collector Encore was back in the credit column, offering £250m Senior Secured Notes due 2026, two months after its balance sheet tie-up with Cabot. Proceeds will take out a portion of the existing GBP 7.5% SSNs due 2023, held at Cabot Financial level. The Notes were upsized to £300m, pricing at 5.375% on Thursday. With Spread to Worst on Encore’s 2025s at 5.23% (close of business Wednesday) and the 5Y UK Gilts trading at 0.039, this suggests the deal offers just ~10 bps of new issue premium.

HY Primary Pricing Action

In light of various cummings and goings this week, we’ve spun up a summary brief of the pricing action in Primary. 

Secondary

Continuing last week’s strong gains, European HY names traded up another +0.97 pts on average (76% +1.42 pts| 22% -0.51 pts). All industries were on the up, with Energy (+1.67 pts) and Consumer Discretionary (+1.60 pts) leading the charge. At the lower end, Materials (+0.45 pts), IT (+0.36 pts), and Healthcare (+0.22 pts) saw more modest returns.

Spreads tightened considerably, with the iTraxx Crossover hitting lows of 280-285 bps earlier in the week, before easing off to 296 bps. The index was quoted 315 bps last Friday, and 369 bps at the end of October.

Markets began to price in a return to normality on news of a viable vaccine, and those sectors most affected by lockdowns saw punchy gains. Hotels, Resorts & Cruise Liners had an average increase of +5.10 pts. Of these, Merlin Entertainments led the pack, with its 2026 and 2027s trading up 8 to 10 pts respectively. In Consumer Services, TUI’s2021s traded up 6 pts to the mid/high 90s, while online travel agent eDreams ODIGEO saw its 2023s up almost 7 pts into the high 90s. As you might expect, pricing on Retailers was also bullish at +2.28 pts, and Restaurants weren’t far behind, wolfing down gains of +1.87 pts.

The largest single name move we tracked came from partially shuttered cinema firm AMC Entertainment, whose 2025 SSNs were up 13 pts, trading just shy of 70 at Thursdays close. A similar rally on its equity saw an initial increase of ~70% on Monday’s open. A steady decline has seen much of these gains eroded, now trading around +20%. 

A boon to any planned equity raise, the added value tempted several US issuers, including AMC, American Airlines, and Carnival Corporation to file offerings with the SEC.