US junk borrowers stumble in last minute rush

IFR 2357 - 31 Oct 2020 - 06 Nov 2020
5 min read
Americas
David Bell

Junk-rated US companies raced to the primary markets last week ahead of the November 3 presidential election, but some ran into trouble as high-yield portfolio managers pulled back on risk because of concerns over rising Covid-19 cases and the outcome of stimulus discussions.

Two high-yield borrowers, packaging company Multi-Color (rated B3/B–) and casual restaurant operator Sizzling Platter (B3/B–) pulled their bond offerings on Tuesday.

“Money managers are reluctant to put more risk on their books at this point," said Adam Coons, a portfolio manager at Winthrop Capital Management. "If they are going to participate in new issues, they are going to ask for more spread.”

Investors objected to Multi-Color's plan to use a US$500m five-year holdco PIK toggle note issue to lever up its capital structure and pay a dividend to its private equity owner, Platinum Equity, after just over one year of ownership.

Sizzling Platter, which was looking to raise US$325m of five-year secured debt, had not been seen in the market since 2011. Rating agencies flagged the company's weak coverage, modest scale and narrow product offering in what remains a difficult environment for restaurant businesses. Price talk had widened to 7.75%–8.00% from initial thoughts of 7.75% area.

While the US election outcome remains a headline risk, concerns over increasing Covid-19 cases and the outcome of stimulus discussions have had more of an impact on how investors position their portfolios at this late stage of the year.

Investors pulled US$2.5bn from high-yield funds in the week through to Wednesday, according to Lipper data.

“I am a little concerned about the market," said one leveraged finance banker. Covid worries are only likely to increase during the winter, which will drive concerns over the impact on global business, he said. "These are the types of things that will cause investors to ramp up their view of risk premiums."

PRIMARY SHIFT

The two cancelled deals last week took the total of pulled deals in October to four, after visual effects company DNEG and shipping terminal operator Ports America also cancelled plans to issue bonds earlier in the month.

Casualties have increased in a primary market that has shifted away from the vanilla refinancing trades that dominated activity through the summer, towards more debut offerings and private equity activity.

"The new issue calendar so far in October has been less attractive to what we saw in the third quarter," said Adam Spielman, head of leveraged credit at PPM America.

According to investment firm TCW, there were 10 debut deals in the first two weeks of October, out of a total 27.

"As valuations get compressed, you don't want to sacrifice credit standards. Coupons for new issues of 6%–7% will entice buyers, but you want to make sure the company has stability in cashflows and asset value for you to own it at par,” said Spielman.

First-time borrowers are trying their luck at a time when Treasury rates are low and the effective yield on the ICE BofA High-Yield Index is at 5.72%, also close to all-time lows.

Private equity activity in the bond market, meanwhile, has been driven by a focus on acquisitions or asset sales to generate growth and concerns about potential increases in the capital gains tax pushing them to try and get deals closed before the end of the year, according to sell-side sources.

"The Fall has been a lot more about the financial sponsors than corporates," said the banker.

WIDER PRICING

Borrowers remained eager to price deals last week despite the soft secondary performance of some trades.

Bonds priced at par on Tuesday by healthcare solutions provider MultiPlan and online auto retailer Cars.com had dropped to around 98–99 by Thursday, according to MarketAxess.

KKR-owned retailer Academy, consumer healthcare product maker P&L Development, and mortgage originator United Wholesale Mortgage all had to price at the wide end or wider than price talk to get their deals done on Wednesday. Those deals were holding up around par to 101 on Thursday.

They were followed on Thursday by CCM Merger (Caa1/B+) and Blackstone-owned reverse mortgage originator Finance of America (B3/B).

CCM, the owner of Detroit casino MotorCity, raised US$275m of 5.5-year debt at 6.375%, inside price talk of 6.50%–6.75%.

Finance of America, however, had to price its US$350m five-year senior note issue at a cash discount of 99 and a coupon of 7.875% to yield 8.12%, wide of 8.00% price talk. The issuer also had to make several improvements to the covenant package in the deal, which will fund a US$300m dividend to shareholders ahead of a merger with SPAC Replay Acquisition Corp.

Three other borrowers are due to price deals on Friday. They include retailer PetSmart, which is looking to raise US$4.65bn of debt to refinance its capital structure and spin off online retailer Chewy to its private equity owners BC Partners.

"If some of these borrowers wait and we go back to a March-type event, they might even be able to access the market," said Coons. "It’s more of an offensive than defensive move."