Investors worked up an appetite for Grubhub’s debut bond on Thursday as the food delivery firm ratcheted in pricing on the deal despite concerns about competitive pressures and poor covenant protections.
And because investors were clamoring for more, the company increased the size of the serving to US$500m from US$400m. Rated Ba3/BB, the eight-year non-call three senior note offering was priced at par with coupon of 5.50%, at the tight end of guidance.
The deal was led by JP Morgan, which was also a joint bookrunner with BAML and Citigroup.
Strong technicals and a market rebound this week on hopes of rate cuts later this year are overshadowing potential cracks in the company’s credit quality further down the road, say some buyside accounts.
“People are looking at the sizzle and not paying attention to the steak,” said one investor.
“Like a lot of tech companies Grubhub is a consumer of capital. The thing that is different here is that they are not only consuming capital, but margins are declining (as well).”
Order books, which were oversubscribed by five times earlier today, closed at 2pm New York time as leads accelerated pricing to Thursday, a day ahead of schedule, a second investor said.
A roaring stock market and low Treasury yields supported a buoyant market overall on Thursday. Even trade tensions were reduced with news that the White House was considering delaying tariffs on Mexican goods.
The bond, Grubhub’s first, is a sign of maturity for the tech name, as it builds out its capital structure.
It went public through a hotly sought-after IPO in 2014, came with a similarly successful follow-on a few months later, and has more recently tapped the bank market for funding.
Proceeds from the bond are going toward refinancing US$340m of existing debt and to fund about US$60m of cash for its balance sheet, according to S&P.
Since the IPO, the stock has climbed from US$26 to high of around US$146.73 in November, only to tumble back to US$63.37 on Thursday.
COMPETITIVE PRESSURES
Concerns about heightened competition in the sector have come to the fore, and have been a topic of conversation among fixed-income analysts looking at the inaugural trade.
“The business is here to stay and makes sense, but [Grubhub] has been making heavy discounts to get market share, so the question is whether it is sustainable in this competitive environment,” said another buyside account.
Analysts and investors have highlighted execution risks as Grubhub looks to compete against the likes of UberEats, DoorDash and Postmates.
“The big question for me is this industry is rapidly evolving,” said the second investor.
“Grubhub was the first, but there is a lot of well-financed competition and a lot of capital is flowing into this space and there will be some consolidation.”
Moody’s noted in a recent report that adjusted Ebitda margins have declined significantly over the last few years, but underscored Grubhub’s moderate financial leverage of 3x and good liquidity.
“Grubhub does not pay dividends and is not expected to make meaningful share repurchases. Moody’s expects primary uses of excess cash and debt capacity will be for acquisitions,” the rating agency said.
Nonetheless, some accounts have wondered whether the bond should carry a stricter covenant package to protect against shifts in the sector.
In a report released this week, Covenant Review pointed to a number of concerns around the bond, including the lack of restricted payment covenants and an ability to incur more debt than is initially apparent.
It also notes that customary merger triggers are missing, so that a merger with a widely held company would not trigger a change of control.
“It is a BB name so there isn’t much covenant protections at that rating level,” said the second investor. “It seems at some point that something will shift and we don’t know what form that will take. If you don’t have any covenant protections with those changes it is a little scary.”
