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November 2022

Debt advisory update

At last some rain!  Given I grew up in North Wales, I never thought I’d say that.  Going through London’s parks this past week has been like exploring the savannah.
The big shock for me was finding out that the Rhine is currently less than 5ft deep at Kaub – wonder if anyone has waded across?

Debt advisory image
TL / DR: recovering IG credit markets; loans lingo; 15 years ago this week
Debt weekly image - 18 Aug 22
  1. Not dead but restin’

    • As evidence that the bond markets might be more like Jairus’s daughter than Monty Python’s parrot, investment grade issuers have found willing investors even in the summer doldrums: SSE priced a €650m 7-year Green bond at 2.875% (credit spread of 120bp), after generating orders of over €5.5bn and St-Gobain priced €1.5bn across 3, 6 and 10 years after receiving orders for over €7bn
    • Annington Homes last week completed a £500m refinancing exercise via a tender for 2024 / 2025 bonds funded by a £400m new issue and a tap of existing 2047 bonds (rated BBB).Goldman Sachs and Barclays led the deals; Numis advised Annington, as we have before
    • This week has seen more European bond issuance than the last 4 weeks combined, though mainly financials and government, with just one corporate deal for RWE
    • However, this window of opportunity for issuers may be closing
      • UK inflation has reached a 40-year high, pushing 2-year Gilts up by 90bp since the start of August, with the 2s10s UK Gilt curve now inverted by 11bp
      • This is mirrored by US Treasuries which are also about 50bp higher, and also inverted, with 2s10s inverted by 37bp
      • Credit spreads - had started to recover but are weaker over the past week: Crossover index of European high yield credit spreads is almost 50bp higher since Monday
    • Let’s see how September goes – a lot of issuers put off going to market before the summer so there is a lot to come.Anyone wanting to issue should be ready to “go” at a moment’s notice
  2. Loans lingo, bonds buzzwords, debt doublespeak, credit clichés

    • I try not to use too much jargon – wary of John Lanchester’s complaint that much financial language is “designed to bamboozle and mystify and intimidate” (the whole essay is fascinating, identifying the first use of “hedge” back to 1671)
    • So this is the first of an occasional piece looking at some commonly misunderstood debt jargon – further contributions welcome
    • Tenor: length of time remaining on a piece of debt vs Maturity: original length of a loan / bond at inception
    • Basis points: the difference between two percentage rates.Fees are always % and not bp; interest margins are always bp not %.“bps” is the devil’s work – would you pluralise “12cm” or “90kg”? (this is the hill I will die on)
    • Commitment fee: (a) leveraged finance bankers: the one-off fee paid for initially committing to a deal (b) everyone else: the ongoing fee paid for continuing to commit an unfunded facility
    • Accordion: (a) squeezebox underpinning Talking Heads’ Road to Nowhere (b) a legal mechanism to upsize a loan without much paperwork.It is not committed and whether it is available is down to how the bank (and its committees) feel at the time.An accordion should never feature in any discussion of liquidity or maturity profile
    • Extension option: key thing about options is who can exercise the option.Almost always any “extension option” belongs to the lender, not the borrower.Like anyone, the borrower always has the “option” of asking the lender to extend but whether this happens is up to them
    • Clean down: a requirement to reduce an overdraft or revolving credit facility to zero for at least 1-4 weeks per year (demonstrating that the debt is indeed cyclical).Not to be confused with …
    • Clean up: permission to breach certain restrictions in the immediate weeks following an acquisition, so that any unforeseen issues at the target can be fixed
    • Corporate finance: can mean almost anything connected with companies and finance: M&A advice, debt structuring, relationship management, corporate treasury teams.Similarly, “Investment banking” has more to do with banking than investment
  3.  Fifteen years later

    • By some measures, last week marked 15 years since the Global Financial Crisis kicked off: BNP Paribas had announced that it was suspending the valuation of its asset-backed securities funds due to “the complete evaporation of liquidity in certain market segments”.It promised to resume “as soon as liquidity returns” (still waiting)
    • I recall it getting difficult a couple of weeks earlier, while I was on a legendary stag party in Hamburg, with headlines like “Bear Stearns Hedge Funds declare bankruptcy”
      • I was skiing in March 2008 when JPM bought Bear Stearns for $236m – later increased to $1.2bn following the uncovering of some drafting errors in the original SPA.This collapse seemed like a big deal at the time but then Lehman …
    • Some date it back to HSBC’s profit warning in February 2007 but I think the top was when Chuck Prince declared on 9 July 2007 that in investment banking “as long as the music is playing, you’ve got to get up and dance; we’re still dancing”.It seems he mistook the coda for the overture
    • For the average Brit, the Crisis really got going when Northern Rock failed and depositors queued in the street, like that scene from Mary Poppins
    • I had just left Rothschild and was about to start work at Barclays Capital, giving me an uncomfortably close-up view of what happens when a fixed-income focused bank encounters a credit crisis
    • In related news, Lehman’s UK bankruptcy proceedings are finally coming to a close after Deutsche Bank won a big victory over US-based hedge funds that could net it $500m.It’s an interesting case, going through the legalities of “cash waterfalls” in subordination agreements but only true debt nerds will want to go through the 47 page judgement
  4. Bonus item – bond issue size accidentally overstated by 2,400%

    • Ben Oldman issued a €100m bond on 1 August; by 2 August, they realised that in fact the issue size should have been just €4m and amended the terms
    • Debt documents (and case law) do provide for contracts to be rectified for manifest error but this is extreme
    • The prospectus states costs of issuance were €440k which is over 10% of the actual proceeds – maybe a refund is in order

Recent UK deals

  • Virgin Media O2 and InfraVia Capital Partners have agreed £3.3bn of debt financing in support of a £3.5bn JV to roll out fibre to the home – provided by a consortium of financing banks.Barclays advised Liberty Global so I’m sure they’re providing a decent chunk of this
  • Euromoney’s takeover / break-up by Astorg and Epiris is backed by a £725m unitranche and £30m super senior RCF, which will automatically split into separate loans when the business is divided between the sponsors.Innovative!
  • Cohort signed a £50m 3-year RCF, bringing Commerzbank alongside NatWest and Lloyds
  • LXi bought a cap for its interest rates, following Warehouse REIT.We’ve heard that some REITs are spending up to £10m to cap rates
  • Pets At Home upsized its to £300m, at SONIA+135bp and with sustainability-linked pricing
  • Coats signed a $250m bridge for its acquisition of Texas Intl
  • Inchcape signed a new £600m loan (£350m 1+1 bridge and £250m term loan) underwritten by MUFG and BNP Paribas
  • HICL increased its facilities to £730m by agreeing a 1-year £330m facility, documented by an accordion (see above!)
  • Carlyle and HPS are providing £1bn-eq of loans for the €2.7bn acquisition of OCS and Atalian by CD&R – amazing to see the family selling out of OCS after all these years and kudos to CD&R for executing the PE classic “combo” acquisition
  • QinetiQ has agreed a £350m facility to part-fund its $590m acquisition of Avantus (on top of its existing £275m RCF)
  • Wheatley (Scottish housing and care group) agreed a £100m sustainability-linked loan for its new build, with Bank of Scotland, NatWest and Nationwide (not often seen in the loan market) alongside a bilateral from Barclays
  • Digital infrastructure investment fund Digital 9 has increased its RCF by £75m to £375m.Existing banks were NatWest, DNB, RBC, Santander
  • International Game Technology added an ESG metric to its RCF under which pricing can be flexed by +/- 7.5bp, on a margin of about 180bp
  • Goldman Sachs continued selling down its Morrisons debt, this time to Pimco at an undisclosed discount

    USPP

  • Big Yellow signed a $225m shelf facility with Pricoa (nothing yet drawn); any new debt is not yet committed and the shelf facility is more a sign of strong intention to lend and facilitating paperwork

    Bonds

  • Annington tendered for £503m of 2024 and 2025 bonds, funded by a £400m 11-year new issue and a tap of an existing 2047 bond
  • The Church Commissioners priced £550m of 10 and 30 year bonds at Gilts +120bp, at a credit rating of Aa1
  • SSE issued a €650m 7-year green bond at 2.875% (mid-swaps +120bp), affirming its status as the UK’s largest issuer of green bonds, with £2.5bn now outstanding

Mike Beadle

Managing Director, Debt Advisory

Email Mike

Disclaimer 

This briefing has been prepared using publicly available information and should not be relied upon for any investment decision. Numis does not make any representation or warranty, either express or implied, as to the accuracy, completeness or reliability of the information contained in this briefing. Numis, its affiliates, directors, employees and/or agents expressly disclaim any and all liability relating to or resulting from the use of all or any part of this briefing or any of the information contained herein. This briefing does not purport to be all-inclusive or to contain all of the information that recipients may require. The information contained herein is subject to change and Numis accepts no responsibility for updating it.

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