The jumbo speculative-grade financing backing the leveraged buyout, or LBO, of the thyssenkrupp AG elevator unit, completed last week, has given leveraged finance investors a look into the pricing landscape across various asset classes and regions in the post-COVID-19 period. The scale of the deal has given some confidence about what can now be achieved across the sector, but caution remains that the European leveraged loan market, for one, has not yet returned to full health.
Due to the sheer size of the thyssenkrupp Elevators transaction, which backs the €16.14 billion acquisition of the company by Advent International, Cinven and RAG, the issuer has tapped into several markets to get the deal done, giving a liquid pricing point for examining the current differentials between the various products. Naturally, much is dependent on the borrower, but this transaction offers a notable snapshot of demand and pricing for a well-liked credit, albeit one that has notable leverage, and a documentation package that required sizeable changes following pushback from investors.
With that in mind, the final deal structure highlights that the European loan market provided the least amount of capital (€1.015 billion), compared with European high-yield bond segment (€2.25 billion), U.S. high-yield (roughly $2 billion/€1.8 billion) and the U.S. term loan market ($2.875 billion/€2.56 billion), according to LCD. Moreover, the fixed-rate secured bonds in both regions and the U.S. term loan were all upsized by a decent amount, with the euro floating rate notes downsized and the euro institutional term loan increased by a smidgen.
Also of note was the success of the unsecured bonds, which flew off the shelves and into the hands of investors, and subsequently traded the best out of all the paper in the capital stack, up roughly two points. This suggests investors are willing to chase the extra yield that comes from subordination in a well-liked credit.
Another part of the financing was a €2 billion offering of senior pay-in-kind notes that included euro and dollar elements priced at 11% and 12%, respectively, according to market sources. The notes mature in March 2029 and are understood to have been placed with a small group of investors, including Goldman Sachs' debt fund, AlbaCore Capital Group and GSO, sources add. The deal priced with a couple of points of original-issue discount and is non-call for two years, then callable at 104, 102 and 100 in subsequent years.
A bondage of opium
Sticking with the secured debt, in Europe, the B/B1/B+ rated €1.1 billion offering of secured high-yield notes priced at 4.375% while a €1.015 billion B term loan — the kind of debt bought by collateralized loan obligations, or CLOs — came at a yield of 4.68%, a differential of 30.5 basis points. This is broadly in line with the first quarter of the year, when on average single-B bonds and loans were lying almost on top of each other, with bonds on average offering a 27 bps premium.
Similarly, the deal gives a data point to illustrate the current relationship between the U.S. and European markets. The $1.56 billion U.S. dollar-denominated secured high-yield notes were priced at 5.25%, suggesting a pricing premium of around 87.5 bps to the European notes. By comparison, at the end of March, on a rolling-three-month basis, the differential between the U.S. and European single-B rated high-yield bond markets was around 240 bps.
In the loan market, both new facilities were completed with margins of Euribor/L+425 with a zero percent floor, suggesting a yield of 4.68% on the euro piece and 5.73% on the dollars, a 105 bps differential. While U.S. and European term loan spreads have been converging for the last few years, in the first quarter of the year on a rolling basis, the U.S. market still offered an average yield premium of 184 bps for single-B rated names, according to LCD.
Pricing to some extent is all held together, though, by relative value of the asset classes. Notably then, when the underwrite first took place, it was envisaged that much of the financing would be raised in the term loan market, but when it came to launch, and following pre-marketing, it was clear the demand lay within high-yield. In order to try and maximize the amount of floating-rate debt, and thus to minimize the amount of call protection, the financing launched with a €1 billion floating-rate note, or FRN. However, with a €1 billion term loan already in the structure, and a big slug of secured fixed notes, this tranche did not see the same level of investor demand, and was subsequently downsized.
Still, with the term loan printing at E+425, at 98, and the FRNs at E+475, at 99.5, there was something different on offer for floating-rate investors. Indeed, Managers of CLOs — the largest investor segment in the leveraged loan asset class — make abundantly clear that original issue discount, or OID, is very important to them at present, but clearly there are those investors willing to give up some convexity and lock in a higher coupon. Ultimately, both deals yield broadly the same.
"The bond market is very confident, it's proved its resilience,” said one European senior banker. "In the loan market, it feels more shaky. The new CLOs coming out are markedly smaller than pre-crisis — it seems that they're using what was already ramped to get a deal priced — so demand feels a bit tentative.”
However, despite some nervousness about the tenacity of leveraged loan market demand in Europe, the syndication process on both term loans was accelerated by one day, though numerous European loan accounts comment that their allocations were generous, indicating slightly more sluggish demand for this tranche. Moreover, as mentioned before, at €1.015 billion, the European term loan market provided the smallest piece of the financing puzzle, which is in stark contrast to last year's LBO of Merlin, when it provided the largest piece.
Bigger is better?
Nevertheless, looking at the financing as a whole, for some participants seeking a confidence boost about market capacity, the successful completion of the deal has given reassurance about the depth of current appetite for new transactions. "For such a big, jumbo deal to get done — and get done well — will provide a lot of confidence to the market at this time,” said one senior banker.
But while the deal is one of the largest cross-border buyout transactions seen since the financial crisis, the issuer has spread its financing — and the demand for liquidity — across a wide range of products. This made each individual debt tranche more manageable. One investor called the term loans "sizeable, but not scary.”
Arguably offering greater confidence is how leads drove pricing in, ensuring fees were maintained, which must have been in doubt a few months ago. This deal was underwritten on pre-crisis terms, leaving it vulnerable to pricing through the caps. Ultimately though, demand was strong enough to keep the coupon well inside caps, and the OIDs down to two points, half of that at which they launched.
Moreover, the jumbo thyssenkrupp Elevators debt package was not the only large deal of June. While the COVID-19 crisis was raging back in April, some bankers had worried that markets would not fully open until September, and yet June was actually one of the busiest of the year to date in Europe across both the high-yield bond and leveraged loan product.
Indeed, some €13.66 billion of European high-yield bonds were recorded across the month, topping the record-breaking €13 billion seen in January, making it the busiest month on record, according to LCD.
Meanwhile in leveraged loans, activity reached €6.97 billion in June. In the year to date, high-yield bond issuance over the first half was €37.17 billion, up significantly from the €29.73 billion in the first half of 2019.
Activity for European leveraged loans is only slightly behind 2019, standing at €37.24 billion in the first six months of 2020, versus €39.50 billion in the same period last year.
However, some market participants, albeit on the buy-side, are reticent to celebrate the quick return to form for the leveraged finance markets in the wake of the crisis.
"I'm not sure if it's comforting or concerning,” said one investor. "It's like we've forgotten what happened. We're still in the middle of a pandemic, but at the moment it feels like we've shrugged it off very quickly. We've not seen a Q2 number yet — this could still go very badly for a lot of people.”
From the banks' perspective, though, this current window is proving hugely fruitful.
This analysis was written by LCD's Nina Flitman and Luke Millar.
LCD is an offering of S&P Global Market Intelligence.