August 14, 2019 / 3:01 PM / 2 months ago

Leveraged markets face cash influx from repayments

LONDON, Aug 14 (LPC) - Billions of euros of repayments from Italian mobile operator Wind Tre and data company Refinitiv are expected to support aggressive conditions in Europe’s leveraged finance markets, as investors remain under pressure to redeploy capital despite rising political and late cycle macroeconomic risks.

Leveraged loan and high yield bond investors are facing an influx of capital after London Stock Exchange Group launched a US$13.5bn bridge loan to back its US$27bn purchase of Refinitiv and CK Hutchison Group Telecom said that it will refinance mobile operator Wind Tre’s €10bn (US$11.15bn) high-yield debt.

“Cash in the non-investment grade world has just gone up materially. LSE’s bid is taking out a huge amount of leveraged finance and Wind will repay a lot of risk capital,” a leveraged finance head said.

Refinitiv’s new bridge loan will refinance the leveraged loans and bonds that supported the US$20bn acquisition of a majority stake in Refinitiv ten months ago by a Blackstone-led consortium. Refinitiv is the parent company of LPC and IFR.

Refinitiv’s existing financing comprises US$9.25bn-equivalent of loans and US$4.1bn-equivalent of bonds and is one of the largest-ever leveraged debt deals. Wind’s €7.3bn-equivalent bonds, which were put in place in October 2017, remain the largest euro-denominated high-yield bond sale.

“Leveraged companies going to investment-grade has caused a huge rally in spreads and put money back in investors’ pockets’ to redeploy,” the leveraged finance head said.

Investors have different strategies to deal with the prospect of near-term repayment, including selling in the secondary market, after Refintiv’s loans rose to par and the bonds climbed over par to call protection levels, in line with Wind’s notes.

“Some investors may decide to trade out now to reinvest elsewhere, and some may want to keep it until refinancing,” a leveraged finance investor said.

Refinitiv’s existing debt is expected to be repaid when the acquisition closes in the next 12-18 months and Wind’s bonds are expected to be repaid this year.

SUPPLY AND DEMAND

The key issue for investors seeking to reinvest is a lack of deals to invest in. The fresh influx of cash is expected to further tilt the supply/demand imbalance as too much cash chases too few deals, which could sustain aggressive market conditions despite multiplying risks in an extended credit cycle.

“There was already shortage of assets before these refinancing plans, and that could lead to tighter spreads,” said another leveraged finance investor.

European leveraged finance volume, including loans and bonds, was 34% lower in the first six months at US$112bn than a year earlier, due to a lack of jumbo acquisitions and uncertainties created by the lingering US-China trade war. The issuance of CLOs, the largest buyer of leveraged loans, was up 7.5% during the same period, however, creating more buyers to chase fewer deals.

Analysts expect more opportunistic and aggressive deals to come to the market in the near term as private equity firms seek to take advantage of the massive liquidity release by paying themselves dividends and loading businesses up with extra debt.

“I think the bigger impact might be arrangers telling issuers they should tap markets now, so I expect more dividend recaps and stretch senior deals,” Edward Eyerman, head of European leveraged finance at Fitch Ratings, said.

Several large financings backing public to private buyouts totaling around €19bn-equivalent, are set to reach the market in September, which will provide some much-needed supply.

Deals include a £2.5bn (US$3.01bn) loan backing Advent’s £4bn purchase of UK defence and aerospace group Cobham; £3.8bn-equivalent of loans backing an acquisition of UK theme park operator Merlin Entertainments; a £1.387bn financing backing the buyout of car auctioneer BCA Marketplace ; and €1.325bn of bonds backing a takeover offer of German lighting group Osram.

Public-to-private deals face more challenges from potential rival bids, shareholders and regulatory intervention and some may not make it over the finishing line. Cobham is facing opposition from its biggest shareholder, Silchester International, which does not find the takeover as compelling.

In May, banks dropped a €2.72bn leveraged loan financing for German online classifieds group Scout24 after it failed to obtain the required level of shareholder support.

“It isn’t a very good year for us,” said the third investor. ($1 = 0.8972 euros) ($1 = 0.8293 pounds) (Editing by Tessa Walsh)

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