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Debt advisory update

Since we last wrote, we’ve got a new PM who is richer than the King and have already had the first resignation from his Cabinet, so it’s not clear if Sunak is going to achieve Michael Gove’s goal of boring government.  (Gove could never be accused of being boring)
Gilts are back under control: the 10-year Gilt rate is now 3.5%, ‘just’ 275bp higher in the last 12 months but a full 100bp below the peak in September. But markets are still pricing UK base rates to hit 4.6% next summer, so plenty of rate rises still to come.

Debt advisory image
Debt weekly image - 16 Nov 22

1.   How to structure a new LBO when debt financing is hard to come by

  • In the US, Blackstone’s recent $14bn deal to buy Emerson’s a/c and refrigeration business contains all the elements we expect to see in new large LBO financings.
  • Selling less than 100%: Emerson is retaining 45% of the business.
  • Large amounts of equity: Including the vendor loan note, over 60% of the EV is equity.
  • Structured equity: Blackstone’s equity is split between ordinary and convertible preferred equity, splitting control and economics.
  • Vendor support: Emerson is supporting Blackstone – this time with $2bn of 10-year unsecured loan note, paying 5% PIK.
  • Middle Eastern / sovereign wealth co-investors: ADIA and GIC are co-investing with Blackstone.
  • Paying up for private credit funds: almost $3bn of 7-year debt at c. 10% interest, plus c. 3% fees.
  • Lean on the banks: there is a $3.6bn facility being held by 9 banks, primarily big lenders and not investment banks. This is amortising over 5 years with a significant step-up in pricing after 3 years – a bit like bridge financing.
  • We expect to see more of this – for example, Ferrovial used #4 to finally dispose of Amey to private equity: only £109m of the £400m enterprise value was paid in cash, with Ferrovial providing £136m through a 5-year loan note and the rest being pension liabilities.
  • KKR’s acquisition of half of Vodafone’s €16bn German towers business is using #1, #2 and #5 (with Saudi Arabia’s PIF providing “additional funding for the transaction”, which sounds like a preference share – so maybe #3 as well).
  • It’s far from the racy structures for Caretech (where debt and preference shares accounted for 88% of enterprise value) or Asda (where TDR / Issa only put in £140m to get control of a business worth £8.5bn inc leases). 

2.   How to extend overextended debt

  • There is about €100bn of leveraged finance debt falling due in 2023 and 2024, which would normally be refinanced over the next 6 months.  So this year’s crop of financing failures will concern borrowers.
  • However, in recent weeks, some deals have pointed how this debt might be dealt with
  • INEOS priced c. €2bn of 5-year term loans to refinance existing debt – while most of this was in US$, nearly €800m was in EUR.  This extended some of its €3.8bn of loans due in 2024 by a few years, but at a material cost: margins moved from +250bp to +385bp, plus the loans were issued at a 3.5% discount to par, so an increase in the annual cost of 220bp (on top of the increase in market risk-free rates).  On €2bn, this is $50m p.a.
  • But INEOS is a big beast and long-established borrower: in total, it has about €20bn of leveraged debt outstanding across its various businesses, and also carries c.€5bn in cash so that its leverage is only about 2x.
  • For less well-positioned corporates, the deal by German pharma Stada was interesting: they issued a new 7.5% 2026 bond in exchange for 3.5% bonds maturing in 2024 – with investors also receiving a 8%pt fee to participate in the exchange.
  • Others even weaker credits have tried a more coercive approach: Keter’s 2-year extension exchange offer also require participating lenders to consent to remove most of the credit protections for non-consenting lenders (an ‘exit consent’ or ‘covenant strip’).  Ultimately BC Partners backed down and will need to come back with a new plan.
  • These ‘exit consents’ had been ruled illegal in the UK in relation to the Assenagon Case (Anglo Irish Bank for those with long memories) but I think we may see more borrowers pushing the boundaries.
  • Other old favourites from 2009-13 that may reappear including ‘forward starting’ loan agreements, finding additional collateral, monetising swap assets, sale & leaseback transactions, and clever use of CDS markets.

3.   Back to the future

  • Credit Suisse has decided to bite the bullet and restructure its investment bank, which may go some way to addressing the structural overcapacity of investment banking in Europe (e.g. 16 bookrunners on a bond?).
  • I suspect this will lead to many job losses and I hope anyone directly affected finds a new role soon.
  • It has also led to the rebirth of the “First Boston” brand – I was amazed to find out that Credit Suisse first invested in First Boston back in 1978 before taking full control after First Boston failed to syndicate $450m of sub-debt for Ohio Mattress (known as the “burning bed” deal).
  • So Credit Suisse has decided to go back in time by restarting “CS First Boston” which will have other investors with a balance sheet of $10bn (for comparison, GS has book equity of $109bn).  Saudi National Bank will invest $10bn into CS at the same time, though it remains just a rumour that CS now stands for Credit Saudi.
  • This made me wonder if any other banks would reintroduce some of the ancient brands that have disappeared:
  • Lloyds Hill Samuel
  • Barclays de Zoete Wedd
  • Soc Gen Kleinwort Benson Hambros
  • Investec Guinness Mahon
  • And (take a deep breath) Hong Kong & Shanghai Banking Corporation James Capel Samuel Montague Midland Charterhouse Keyser Ullman
  • As an ex-Arthur Andriod, I’m delighted to see Andersen.com but salomonencore.com just seems a bit odd.  And Credit Suisse is presumably a bit disappointed to find firstboston.net.

Selected interesting recent UK financings

  • CentralNic arranged $250m of 4-year term and revolving loans, at SOFR+275bp.
  • Jet2 signed a new £300m RCF with the four UK banks.
  • The Sterling bond market was boosted by deals from Northumbrian Water (£400m for 12 years at 6.375%) and Northern Ireland Electricity (£350m for 10 years at 5.875%).  But access for smaller / more cyclical issuers still seems some way off.
  • Diageo and BAT flexed their muscles in the US4 bond market, with Diageo issuing $2bn across 3-10 years at coupons of 5.2-5.5% and BAT issuing $600m at 7.75% (which is a credit spread of 380bp for a BBB+ issuer – maybe ESG concerns are starting to bite?).
  • Kape agreed a $425m term and revolving loan with Bank of Ireland, Barclays, Citizens, BNP Paribas, Citi, Leumi, HSBC and (surprisingly!) Credit Suisse, paying SOFR + 275bp.
  • Train leasing firm Porterbrook signed a £500m 5-year sustainability linked loan.
  • Impact Healthcare cancelled a Metrobank facility and increased an HSBC 2.5-year RCF to £75m at SONIA +200bp.
  • Sainsbury’s pension fund signed a new £500m RCF with Sainsbury’s to fund collateral claims.  If supermarkets are becoming banks then can I pick up a bottle of wine at Barclays?
  • PlayTech signed a new €277m 3+1 year RCF, downsized from €317m previously. 

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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