Faith in a comeback in high-yield issuance after a disastrous summer was fading fast until Apollo-owned Italian gaming company Lottomatica broke a two-month drought in the euro primary market on September 14 with an M&A bond.
Normally sponsors first identify their targets and then turn to banks to get the money, but the unprecedented has now long supplanted normality in both global affairs and markets.
Amid acute market volatility, heightened illiquidity and investors’ dismay at seeing heavily discounted deals printed in June and July trading down in the secondary market, Lottomatica was effectively asking for war-chest financing. This was a €350m five-year non-call two senior secured note to finance its expansion via undisclosed and potentially unknown acquisition targets in the next 12–18 months.
It clearly wasn’t the best time for banks to ask investors for a blank cheque for a sponsor, even if it was willing to pay hefty coupon. So how to lure cautious investors out of the trenches and make them comfortable? By structuring an escrow feature to subject the release of the funds to certain conditions. Proceeds from this best-effort transaction were initially placed in an escrow, which would be unlocked for potential strategic investments or acquisitions and general corporate purposes as long as Lottomatica passed a 3.25 times pro forma net opco leverage test.
The greater control and visibility offered by the escrow mechanism attracted a wider range of investors, with bankers tapping into alternative pockets of liquidity to support the deal. This translated into a well-subscribed offer, enabling bankers to ditch initial considerations around a possible OID and dual-tranche bond offering including a floating-rate note.
Books were around €1.1bn, with the bond landing at a yield of 9.75%. That was at the tight end of guidance and initial price talk in the 10% area. No doubt the deal came with a big premium, with some putting fair value at 8.25%. But in a year when the market was shut for long periods, it was understandable that the issuer played it safe.
Aside from the extensive pre-marketing effort, timing was key. Bankers made a quick dash to the market, seizing on tighter credit spreads off the back of improved conditions in September. The two-day transaction marked the first issue to print at par since February 10.
Barclays (B&D) and Deutsche Bank were joint global coordinators and bookrunners, while Credit Suisse, Goldman Sachs, JP Morgan and UniCredit acted as joint bookrunners.
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