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Monday, 20 November 2017

North America High-Yield Bond House

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A creative spark: In a red hot 2012, Credit Suisse outperformed in the US market by maintaining strong market share despite its size, and bringing forth creative, difficult and consistent issuance. For these reasons, it is IFR’s North America High-Yield Bond House of the Year.

To see the full digital edition of the IFR Review of the Year, please click here.

The ultra-low interest rate environment in 2012 led to massive high-yield issuance. For the awards period, a total of US$296.57bn was priced, while even in mid-November the year to-date total (US$289.47bn) exceeded the previous full-year record of US$260.06bn set in 2010.

In this environment, Credit Suisse outperformed, excelling at storied credits, Triple C and secured issuance, as well as sponsor-backed deals.

The bank punched above its weight in the US high-yield market as it delivered more new issues with less capital employed. Its risk-weighted assets totalled US$248bn at the end of the third-quarter 2012, a much smaller number than some of its competitors.

Yet it continued to maintain an impressive market share, this year leading US$33.36bn from 62 deals for 11.3% share of the action. That was the No. 3 position under JP Morgan and Bank of America Merrill Lynch in terms of lead-left issuance.

The number is also striking considering that roughly 60% of issuance in 2012 was refinancing-related. For the most part, refinancing activity stemmed from higher quality corporate clients, which are typically the natural reserve of the larger, more capital intensive banks.

Sponsor-backed

In that way, Credit Suisse’s leading position also demonstrates its strong relationship with sponsors. While LBOs represented less than 5% of the US high-yield market, the bank led some of the important sponsor-backed transactions of the year. 

One of the most notable deals of the year was Reynolds Group’s 5.75% senior secured notes due 2020. At US$3.25bn in size, it was the largest deal of the year (earlier in the year, CIT priced a US$3.25bn two-part offering, matching Reynolds’ single tranche offering in size). Credit Suisse acted as sole lead.

Reynolds, a food packaging and storage provider owned by New Zealand-based Rank Group, is a large issuer with roughly US$20bn in loans and bonds.

In 2011, the company tapped the market with a US$2.5bn bond along with a US$2bn loan to fund the acquisition of Graham Packaging, bringing the deal through Credit Suisse lead-left. This time around, Reynolds was looking to price new bonds and loans to refinance term loan debt and create more flexibility.

For its part, Reynolds likes long-term, non-amortising, fixed-rate, covenant-free capital, and wanted to see how far it could go in the bond market. Credit Suisse initially launched a US$1bn eight-year non-call three senior secured notes offering.

“We had our eye on US$3bn when we launched the US$1bn, but recall that this was a time when the market was jittery, with a lot going on with the US fiscal cliff and elections,” said Brent Patry, co-head of US leveraged finance capital markets.

Even given the unsteady backdrop, accounts warmed to the transaction and put enormous scaled orders in, incentivising the issuer to consolidate more maturities besides the term loan, and ultimately refinance the 7.75% notes due 2016.

This demand allowed for same-day execution and a massive upsize to US$3.25bn. The B1/B+ rated issue priced at 5.75% at par, the midpoint of price talk but inside of whispers.

While Reynolds is a well-liked credit, Moody’s and S&P had downgraded it just a week prior to the bond offering due to low earnings growth and high leverage.

Credit Suisse waited to see how investors would react to the negative ratings news.

“The market took it in stride, and we sold the credit based on still high quality 3.4 times leverage,” said Patry. “People like the company and we got it done at Double B levels.”

Other dealers and brokers were heard to be leaning on the deal, with expectations that it would not trade well in the aftermarket. However, it rose half a point to three-quarters of a point on the break and as of mid November traded at 101–101.50.

WOW factor

WOW! (WideOpenWest)’s US$1.02bn two-part offering also stood out. The cable company, controlled by Avista Capital, entered the bond and loan markets to fund the acquisition of Knology for US$3.5bn including debt.

Originally roadshowed the last week of June as a single tranche of eight-year non-call four senior unsecured notes (Caa1/CCC+), the deal hit some speed bumps as it ran up against the July 4 holiday and choppier conditions, which led two other deals to postpone or withdraw.

Also working against it was the small amount of equity contribution from Avista, at US$200m, and the relatively high leverage.

“When we marketed this deal, while people loved the company, the markets had soured and leverage was pretty lofty,” said Patry.

As the Caa1/CCC+ rated deal came under pressure, leads decided to delay it for roughly a week and revise the structure, splitting the deal into a senior unsecured piece that was 5.9x levered and a senior subordinated issue that was levered at 6.5x. Covenants were also tightened.

The split allowed for a relative value play which investors were happy with, and by getting momentum back for the bond deal, leads also created more interest for the new loans.

In the end, on July 12, a US$725m seven-year non-call three senior unsecured note priced at 10.25% at par, while the US$295m 7.25-year non-call three senior subordinated notes priced at 13.375% at a discount to yield 13.75%. 

In touch

Credit Suisse led a number of secured new issuance deals, including Community Health, K. Hovnanian Homes, Cheniere, DJO Global and Verso. Its success in this area demonstrates the high-yield group’s strong dialogue with investors and its product agnostic approach to its loan and bond business.

“At the end of the day, we are all in the same business and have the same P&L,” said Marc Warm, head of US high-yield capital markets. “That has helped us drive a lot of this secured bond business by being in great touch with the loan investors who are looking to flip into a bond.”

Credit Suisse priced several transactions for Community Health over the year that effectively helped refinance or extend nearly US$7bn of short maturity debt related to the 2007 acquisition of Triad Hospitals.

The bank also led a number of Triple C offerings, including the WOW! transaction, and deals for Aurora Oil & Gas Limited, DJO Global and K. Hovnanian Homes.

Furthermore, its presence in Canada grew through lead-left issuance for Precision Drilling, Flint, Lone Pine and Connacher Oil and Gas, while it also jointly led deals for MEG Energy, Norbord, Inmet Mining, Petrobakken, Baytex Energy Trust and Mercer.

Finally, investors praised Credit Suisse for its high quality of issuance, its balanced approach between issuers and the buyside, its creativity and ability to work well with the buyside to come up with modifications or solutions, its strong distribution efforts, solid aftermarket performance, its consistency and the difficulty of offerings it has priced.

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