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PE Shops Look To Europe High Yield Mart for M&A, LBO Deals

europe hy PE

Private equity shops are accessing the European high yield bond market at a rapid clip so far in 2018, with an emphasis on M&A and LBO transactions, according to LCD. Through Feb. 15 there had been nearly €2.5 billion in European high yield deals backing these purposes, more than in any similar period of a year in recent memory.

Sponsors are turning to bonds in Europe largely because of that market’s considerable tolerance for risk, sources say, be it a willingness to take on storied credits or those from less-liked sectors, according to LCD’s Luke Millar.

Some of the M&A-related offerings so far this year:

  • A €1.45 billion-equivalent issue backing KKR’s Selecta, a self-serve coffee concern (there was a large refinancing component here, as well)
  • a €660 million-equivalent issue for credit-management service Lowell, backing the acquisition of a carve-out business from Intrum (Permira is the deal sponsor).

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Avolon HY Bonds Climb On Amended Guarantee Structure

Bonds backing Avolon  were climbing Thursday, across the board, after the aircraft lessor granted its unsecured noteholders long-awaited clarity, via an amended guarantee structure, over how cash from operations will be applied to unsecured debt repayment. The move comes alongside Avolon’s announcement of a $250 million dividend to immediate parent Bohai Capital while reining in the issuer’s ability to make future payments to its liquidity-strapped direct owner.

The amendment should provide long-awaited relief to unsecured noteholders worried about their subordinated status in Avalon’s existing structure, and harboring concerns that Avolon might issue new debt that would cram them down. In the wake of the investor presentation, the company’s 5.25% notes due 2022 and 5.5% notes due 2024 rose roughly 2.875 and 2.125 points, respectively, to 101.375 and 101.5, according to MarketAxess.

Avolon’s term debt, meanwhile, has largely remained unaffected from chatter surrounding potential liquidity concerns at its parent company. Its B-2 term loan due 2022 (L+225, 0.75% LIBOR floor) was at 99.875/100.125 this morning, while its B-1 term loan due September 2020 (L+175, 0% floor) was quoted at 99.5/100, virtually unchanged from the previous session. Avolon in November repriced its then $368.75 million B-1 term loan to from L+225, while in September the issuer cut pricing on its then $5 billion B-2 term loan from L+275.

Avolon bonds were buffeted in early December on reports that some HNA entities were not current on certain obligations. Avolon already had raised eyebrows last summer after it made a $365 million intracompany loan to subsidiaries of Bohai Capital. That loan was pitched to the ratings agencies as one-off in nature, but investors turned their focus to Avolon’s ability to demonstrate its touted independence from HNA and Bohai.

Fitch Ratings published an investment note Thursday, reaffirming Avolon’s corporate and unsecured bond ratings of BB. “The amendment to the existing guarantee structure seeks to ensure that Avolon’s full operations explicitly support unsecured debt repayment,” noted the agency.

Sources note that lenders have raised concerns over the structure of Avolon’s proposed shareholder payments baskets, which were briefly outlined in the slide deck of the investor presentation. Avolon indicated a $800 million general basket for shareholder payments, alongside a builder basket set at 50% of consolidated net income of Avolon from January of this year plus 100% of incremental capital contributed to Avolon. “Suffice to say, there are questions remaining on ‘strictness’ of new amendments vis-à-vis accessing the new ‘baskets,’” sources noted.

Moody’s followed up with affirmation of its Ba2 corporate and Ba1 senior secured ratings for Avolon, along with its Ba3 senior unsecured rating for the company’s debt-issuing unit, Park Aerospace Holdings. The agency noted that the credit benefits of Avolon’s plans are partially offset by the constrained liquidity and high debt levels of Bohai and its controlling shareholder, HNA Group.

The rating agencies’ focus has largely been on the new mandatory redemption covenant, which is subject to suspension if the unsecured notes (BB–/Ba3/BB) are assigned at least investment-grade ratings from at S&P Global Ratings, Moody’s, or Fitch.

Investor, meanwhile, are scouring the presentation slides for information that might shed more light on just how much protection the proposed new framework will offer them. — Staff reports

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Rite Aid, Albertsons Bonds Jump On Merger Announcement

Debt backing Rite Aid (NYSE: RAD) jumped following news that Albertsons has agreed to acquire the drugstore chain in a bid to create a food and wellness giant.

Rite Aid was the morning’s most actively traded name in high yield. Its 6.125% notes due 2023 were up seven points on the day, to 100.25, according to MarketAxess.

 

Meanwhile Albertsons 6.625% notes due 2024 were also changing hands at a steady clip, tacking on a point, to 96.

Over in loans, Albertsons B-5 term loan was bracketing 99 this morning, while its B-6 term loan was at 98.5/98.875, both off about a quarter point from Friday’s session, sources said. The issuer’s B-4 term loan was at a 98.5/99 market today, down about an eight of a point from the last session. As of Dec. 2, $5.619 billion total was outstanding on the term loans, SEC filings show.

Albertsons announced early Tuesday that it has agreed to acquire Rite Aid to create an integrated company that will be reportedly worth about $24 billion.

Following the closing of the deal, expected in the second half of 2018, Albertsons’ shareholders will own a 70.4–72% stake in the merged entity, while Rite Aid shareholders will own a 28–29.6% stake in the combined company.

 

The merged entities shares will trade on the New York Stock Exchange following the deal closing. (Albertsons is currently a privately held company controlled by Cerberus Capital Management.)

In a statement, Albertsons said the combined business is expected to generate year one revenue of about $83 billion and year one adjusted pro forma EBITDA of $3.7 billion, with a net leverage ratio of 3.8x at transaction close.

The combined company will operate about 4,900 locations, 4,350 pharmacy counters, and 320 clinics across 38 states and Washington, D.C.

Credit Suisse and Goldman Sachs served as lead financial advisors to Albertsons. Bank of America Merrill Lynch also served as financial advisor to Albertsons Companies and is providing committed financing for the proposed transaction together with Credit Suisse and Goldman Sachs. — Kelsey Butler/James Passeri

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Fridson: The HY Spread-Widening Accompanying Recent Stock Market Plunge Not an Anomaly Demanding an Explanation

Synopsis: The modest high-yield spread-widening that accompanied the early February stock market plunge was not an anomaly demanding an explanation.

Stocks’ long period of stability came to an abrupt halt on Groundhog Day and the non-investment-grade bond market’s response quickly became a topic of interest. Barron’s “The Trader” column noted that “the high-yield bond market is refusing to act as if a crisis is at hand” (see note 1). The “Current Yield” column elaborated:

The extra yield investors demand to hold high-yield bonds instead of Treasuries widened just 0.26% in the selloff, contrasting with 2015 and 2016: The Standard & Poor’s 500 fell 12% and 11% respectively, and high-yield spreads climbed 1.5% and 2.75%, notes FundStrat’s Tom Lee.

High-yield has been relatively stable, as Lee wrote Friday. “It is extremely unusual that HY would diverge so sharply,” he said (see note 2).

Let us explore that last statement a bit more closely. How unusual, in fact, is the high-yield’s comparatively muted response to the equity market selloff? In the week-over-week period from Feb. 1 to Feb. 8, preceding the one-day rebound on Friday, Feb. 9, the change in the level of the S&P 500 was –8.54%. During that same interval, the option-adjusted spread (OAS) on the ICE BofA Merrill Lynch US High Yield Index widened by 30 bps. The table below shows how the OAS behaved during all weekly stock market declines of comparable magnitude from 1990–2017:

It is true that the high-yield risk premium increased far more than the recent 30 bps in some previous major stock market selloffs. Note, however, that the three largest spread-widenings—126, 199, and 274 bps—all occurred during the Great Recession of January 2008–June 2009. In two other instances, including the worst weekly S&P 500 change in our sample of stock selloffs of a similar magnitude to the latest one (–10.54% in the week ending April 14, 2000), the ICE BAML High Yield Index’s OAS widened by less than the 30 bps widening from February 1–8. In fact, that stock plunge was accompanied by the smallest high-yield spread-widening in the sample, a barely positive two basis points.

While the sample size for these events is small, the limited evidence indicates that barring a recession, a high-yield spread-widening of only 30 bps is not anomalous. Granted, the spread widened by more than twice as much, 72 bps, in the non-recession week ended Aug. 5, 2011. Interestingly, that stock market selloff originated in the debt market. S&P Global Ratings downgraded the U.S. Treasury from AAA to AA+, adding that further downgrading was possible, and Moody’s warned that it, too, might lower its rating. This all happened in the context to fears that the debt crisis then engulfing Portugal, Ireland, and Greece would spread to Spain and Italy.

In short, one could even argue that a widening of 30 bps in the high-yield spread from Feb. 1 to Feb. 8 was an emphatic, rather than a reserved response to the stock selloff, considering that neither a recession nor a sovereign debt crisis was underway. Again, one should not overstate the importance of these conclusions, given the small number of observations. Still, it is by no means clear that there is a puzzle in need of solving in the current divergence between the equity and high-yield markets’ views of the factors that influence the values of risky assets.

Marty Fridson, Chief Investment Officer of Lehmann Livian Fridson Advisors LLC, is a contributing analyst to S&P Global Market Intelligence. His weekly leveraged finance commentary appears exclusively on LCD, an offering of S&P Global Market Intelligence. Marty can be reached at [email protected]

Research assistance by Kai Zhao and Yaxian Li.

 

Notes
1. Ben Levisohn, “After Correction Pain, More Market Gain?” Barron’s (Feb. 10, 2018).

2. Mary Childs, “Bonds Behaving Well: A Tale of Two Markets,” Barron’s (Feb. 10, 2018).

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US High Yield Bond Funds See $2.7B Investor Cash Withdrawal


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U.S. high-yield funds recorded an outflow of roughly $2.7 billion for the week ended Feb. 7, according to weekly reporters to Lipper only. This follows last week’s exit of about $1.7 billion and marks the fourth consecutive week of outflows, for a total of $8.7 billion over that span.

This week’s exit was fairly evenly split with a $1.4 billion outflow from mutual funds, while $1.3 billion exited ETFs.

The year-to-date total outflow from high-yield funds is now at about $5.9 billion.

The four-week trailing average declined to negative $2.2 billion for the period, from negative $825 million last week, and the change due to market conditions this past week was a decrease of $1.7 billion.

Total assets at the end of the observation period were $202.2 billion, indicating the lowest point since November 2016. ETFs account for about 23.5% of the total, at $47.6 billion. — James Passeri

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Wynn Las Vegas Bonds Rally After CEO Steve Wynn Resigns

Bonds backing Wynn Las Vegas were climbing in heavy trading Wednesday, after Steve Wynn announced his decision to step down, “effective immediately,” as chairman and CEO of parent company Wynn Resorts (Nasdaq: WYNN). The company also announced it has appointed current Wynn Resorts president Matt Maddox as its CEO and Boone Wayson as non-executive chairman.

The decision follows more than a week of steady declines of the unsecured notes backing the Las Vegas subsidiary, following a Jan. 26 Wall Street Journal report that “dozens of people” had come forward to recount a decades-long pattern of sexual misconduct by the chief executive. Wynn Resorts’ board of directors promptly formed a special committee to look into the allegations, and Steve Wynn shortly thereafter resigned from his post as finance chairman of the Republican National Committee.

“In the last couple of weeks, I have found myself the focus of an avalanche of negative publicity,” Steve Wynn said in a Wednesday statement. “As I have reflected upon the environment this has created—one in which a rush to judgment takes precedence over everything else, including the facts—I have reached the conclusion I cannot continue to be effective in my current roles.”

Wynn Las Vegas 5.25% notes due 2027 and 5.5% notes due 2025 climbed roughly 3.875 points and 2.125 points, respectively, as the most heavily traded issues in high-yield Wednesday morning, rising to about 100.625 and 102.625, according to MarketAxess.

The 2025 tranche had been trading as high as 105 after the issuer on Jan. 22 detailed better-than-expected earnings for its fourth quarter. Wynn Resorts booked adjusted EBITDA for the quarter of roughly $480.2 million, topping analyst forecasts by about 7.9%, as net revenue of $1.69 billion for the period also beat estimates by roughly 8.3%, based on consensus data provided by S&P Global Market Intelligence.

Wynn Resorts, which is based in Las Vegas, develops, owns, and operates destination casino resorts in the U.S. and Macau. — James Passeri

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iHeart Skips $106M Interest Payment, Enters 30-Day Grace Period

iHeartCommunications has failed to make a $106 million February 1 interest payment to holders of its 14% senior unsecured notes due 2021, entering instead into a customary 30-day grace period with its lenders.

For nearly 11 months, iHeartMedia has been negotiating the terms of a sweeping debt exchange targeting roughly $14.6 billion of its $20 billion debt load at its iHeartCommunications subsidiary, including $6.3 billion of its term loan debt. Despite sweetening the offer a month later, the out-of-court restructuring failed to gain traction with noteholder participation reported at just 0.4% at the Jan. 18 update.

After being extended multiple times, the current debt exchange deadline is 5 p.m. EST on Feb. 16.

In a press release the company said that active discussions are continuing among its lenders, noteholders, and financial sponsors on the terms of a debt restructuring.

Citi analyst David Phipps said in a note to investors this morning that he does not expect a successful debt exchange owing to varying interest among creditors. In the event of a bankruptcy, Phipps expects iHeart term loans and priority guarantee notes to trade down at least 10 points since no interest would be paid during bankruptcy.

Restructuring proposals filed with the SEC late last year disclosed iHeart’s sponsors, Bain Capital and Thomas Lee Partners, had offered creditors 87.5% of the reorganized equity, as well as 87.5% of the company’s stake in Clear Channel Outdoor, its partially owned billboard subsidiary.The filing also showed that senior lenders had yet to bridge their differences on key terms, which as reported, include the value of the Clear Channel Outdoor business, the assets of which became a source of a contention following iHeart’s disputed 2015 transfer of Clear Channel Outdoor shares to its Broader Media unit.

Bain Capital and Thomas Lee Partners–owned iHeartMedia operates as a media and entertainment company through three segments: iHeartMedia, Americas Outdoor Advertising, and International Outdoor Advertising. The company formerly known as Clear Channel changed its name to iHeartMedia, Inc. in September 2014.

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Fridson: Industry High-Yield Risk-Adjusted Returns

This article is courtesy Martin Fridson, who writes weekly and monthly high yield bond analysis for LCD News. 

Tactical asset allocators may make use of our monthly reporting on industry returns (for momentum-based strategies) and relative value (for value-based strategies). Strategic asset allocators, on the other hand, are more concerned with industries’ long-run, risk-adjusted returns. The table below addresses that need, covering the industries that make a material difference.

We rank the 20 industries based on the table’s shaded column. It contains the Sharpe ratio, calculated by subtracting the mean risk-free return from the industry’s mean return and dividing by its standard deviation. Our proxy for the risk-free asset is the ICE BofA Merrill Lynch US 3-Month Treasury Bill Index, which had a mean return of 0.552%. The observation period consists of all full calendar years for which returns are available on the ICE BAML High Yield Index’s industry subindexes, i.e., 1997–2007.

Under a very strict form of the Efficient Market Hypothesis (EMH) that we might label the Omniscient Market Hypothesis (OMH), all industries would have the same Sharpe ratio. Their returns would differ, to be sure, because industries differ in the inherent volatility of their cash flows, as in the case of cyclicals versus non-cyclicals. Those differences would not necessarily be offset by companies’ financial policies, i.e., use of higher leverage in more stable industries and vice versa. In an OMH world, however, the market would cap prices perfectly in anticipation of both ordinary cyclical variation in cash flows and shocks such as the disruption of Super Retailing (department stores, specialty stores, and discounters) by online merchants. Through this market omniscience, each highly volatile industry’s return would be high enough to produce a Sharpe ratio competitive with every other industry’s.

The table shows how far the reality of the high-yield world is from that idealized vision. Sharpe ratios for 1997–2017 range from as low as 0.08 to as high as 0.37. We conclude that strategic industry allocation decisions made a considerable difference not only in absolute returns, but also in risk-adjusted returns.

As would be expected even under the OMH, historical standard deviations of returns range widely, from 3.594% for Healthcare to 10.978% for Broadcasting. In some cases, investors have been rewarded for accepting high variance by a high average return. For example, Broadcasting topped the list not only in standard deviation, but also in mean return, at 2.854%. Even that return premium over the 20-industry median of 2.505%, however, did not quite suffice to enable Broadcasting to match the group’s median 0.24 Sharpe ratio. Broadcasting came in at 0.21.

Neither was it the case that the lowest return in the group, 1.218% on Telecommunications, was associated with the group’s smallest risk. Rather, Telecommunications’ standard deviation was 7.881%, well above the 6.036% peer group median. Telecommunications’ full-period 1997–2017 performance was dragged down in the Tech Wreck. On an annualized basis, the ICE BofA Merrill Lynch US High Yield Telecommunications Index returned –25.116% during 2000–2002, versus 3.677% for the ICE BofA Merrill Lynch US High Yield Excluding Telecommunications Index. Clearly, the market extracted far too small a penalty rate on Telecommunications issues heading into the 2000 blowup.

Marty Fridson, Chief Investment Officer of Lehmann Livian Fridson Advisors LLC, is a contributing analyst to S&P Global Market Intelligence. His weekly leveraged finance commentary appears exclusively on LCD, an offering of S&P Global Market Intelligence. Marty can be reached at [email protected]

Research assistance by Kai Zhao and Yaxian Li.

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Wynn Las Vegas bonds Extend Losses Amid Harassment Cloud

wynn logoBonds backing Wynn Las Vegas were falling sharply today—with the issuer’s 5.5% bullet notes due 2025 shedding three points, to 101.5—to extend declines since reports surfaced on Friday alleging sexual misconduct on the part of Steve Wynn, CEO of parent company Wynn Resorts. The casino magnate has described the accusations as “preposterous,” but on Saturday resigned from his post as finance chairman of the Republican National Committee.

Wynn Las Vegas 5.25% bullet notes due 2027 today shed about two points in heavy trading, to par, after falling as low as 98.75. The decline marked the issue’s first trades below par since the pricing at par last May, with proceeds of the $900 million offering backing the company’s purchase of outstanding 5.375% first-mortgage notes due 2022. Meanwhile, more than 18% of Wynn Resorts’ market cap was erased from closing levels on Thursday, as shares of Wynn Resorts (Nasdaq: WYNN) tumbled a further 9.2% on Monday—leading the decline of the S&P 500—to $163.54 in midafternoon trading. Trades were at a 12-month high north of $200 following the company’s earnings report one week ago.

On Friday, the Wall Street Journal reported that “dozens of people” had come forward to recount a pattern of sexual misconduct by the chief executive, over a period of more than 10 years. The news triggered an immediate plunge in the stock price, but bond-market reaction was initially more circumspect before today’s heavier losses, as analysts said the biggest risk to bonds would be the ouster of the company’s CEO. Wynn’s board of directors has formed a special committee to look into the allegations.

The declines mark an abrupt reversal from gains last week, after the issuer on Jan. 22 detailed better-than-expected earnings for its fourth quarter. Wynn Resorts booked adjusted EBITDA for the quarter of roughly $480.2 million, topping analyst forecasts by about 7.9%, as net revenue of $1.69 billion for the period also beat estimates by roughly 8.3%, based on consensus data provided by S&P Global Market Intelligence.

On last week’s earnings call with analysts, Steve Wynn touted progress on its “first class” Wynn Boston Harbor construction project in Everett, Mass., which he said represents the “largest private investment in the history of the Commonwealth.” Notably, the Massachusetts Gaming Commission initiated a review of the project over the weekend in response to the emerging allegations.

Wynn Resorts, which is based in Las Vegas, develops, owns, and operates destination casino resorts in the U.S. and Macau. — James Passeri

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US High Yield Bond Funds See $1.1B Investor Cash Withdrawal

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U.S. high-yield funds recorded an outflow of roughly $1.1 billion for the week ended Jan. 24, according to weekly reporters to Lipper only. This week’s outflow follows last week’s exit of roughly $3.1 billion, and brings the total outflow from high-yield funds so far this year to about $1.4 billion.

ETFs made up the bulk of this week’s outflow, with an exit of roughly $621 million, while $510 million was pulled out of mutual funds.

The four-week trailing average widened to negative $342 million, from negative $119.5 million last week.

The change due to market conditions this past week was an increase of $123.5 million. Total assets at the end of the observation period were $207.8 billion. ETFs account for about 24% of the total, at $50.3 billion. — James Passeri

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