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Debt Advisory Weekly

Happy Lunar New Year!  Year of the Ox and in celebration, I’ve just received my home delivery from Hawksmoor of a prime rib dinner.
In other news, Happy Palindrome day! At least in the UK.

Debt weekly image - 12 February
TL / DR:  Asda Price; Cruising to a bruising; Ready to report 

1.   Asda Asda Asda

  • I know I wrote about it last week but it’s not often a high yield bond deal is the lead story on the front page of the FT.
  • Kudos to Barclays who underwrote this back in September and pulled off by far the largest ever sterling High Yield Bond with an order book of over £8bn.  Not coincidentally, this deal priced was in the same week that the Sterling High Yield Index reached its lowest ever yields of just under 4%.
  • I think TDR / Issa are paying about £780m for annual equity free cash flow of c. £250m  (and even this equity cheque came from re-leveraging their other business).
  • Historically, large LBOs for UK-focused businesses were not funded just in sterling since the market was viewed as being too small.  For example, Liberty Global’s 2013 acquisition of Virgin Media (another entirely domestic business) was funded by $8.3bn in loans and bonds but ‘only’ about $2.3bn was in sterling.  Also worth noting that the average cost of debt for VMED was about 6% compared to 3.25% for Asda.
  • This often meant large cross-currency swap lines were required, which are very credit intensive for banks and expensive for borrowers – often adding 0.5% p.a. to the cost of financing and restricting banks’ appetite to provide other forms of loans.
  • Barclays’ success in attracting European and US investors, as well as “investment grade” tourists, is likely to support leveraged buy-outs of ever-larger UK companies.
  • Also worth noting that this liquidity benefits smaller borrowers too: Iceland Frozen Foods took advantage of Asda’s headlines to issue £250m of high yield to refinance existing debt.

2.   Travel & Arrive

  • You may remember last May Carnival Cruises paid 11.5% for $4bn of three-year funding secured on its cruise ships.  Showing how quickly the world turns, this week it issued $3.5bn of 6-year year unsecured bonds at 5.75%.
  • It’s a measure of how much this is a markets and liquidity phenomenon: earlier this year, Royal Caribbean sold three of its luxury cruise lines to a private equity business for $201m – which resulted in an impairment charge of $170m i.e. the assets were sold for just over 50% of book value.
  • Investors would rather have marketable securities that they believe they can sell quickly instead of real assets – forgetting that “people are worried about bond market liquidity”.
  • Pair this with a nice write-up in the FT (free version here) about how these borrowers are at risk of becoming Jane Austen heroines, where the story ends with the marriage and we don’t find out whether it really was happily ever after.  It’s great that everyone has accessed liquidity but they will have to live with this extra debt for years.
  • Cue puns about Primed & Preference, Cents & Sensibility, GEMMa.

3.   Reporting Deadlines

  • I was tickled by the news that GameStop couldn’t issue stock to take advantage of its crazy share price because it was in a closed-period ahead of its January year end.  It’s hard to see what sort of information the board could have possessed that could have been sensitive to a stock price that rose 240% simply and only because it had already risen by 200%.
  • Closed periods are particularly relevant for bond issuers, particularly high yield: SEC rules require prospectuses to contain financials that are less than 135 days old (I summarise: more detail here).
  • Last year, UK annual reports were produced on average within 58 days (p53) which was quicker than 2019!  But this leaves only 11 weeks before the financials go “stale”.  On top of this, many credit markets are closed / very quiet in December and end-July through to early September.
  • For UK issuers that (a) report only semi-annually and (b) have a March year end, this can leave some really narrow issuance windows: basically a week or so in December and 5 weeks in January / February plus June and the first half of July.  Best solution is to try report earlier.
  • (Loan tip: resist letting banks regulate year end dates through loan covenants – it’s really not necessary for large or listed companies).
  • Also in GameStop space, a small Australian mining company saw its stock price rise by 50% because its ticker was also GME – another nail in the coffin of efficient markets.

UK debt financings this week:

  • Expect more corporate loan news next week as companies release full year results
  • Iceland Frozen Foods issued £250m of 7-year B2 / B  / B+ high yield bonds at 4 ⅜%, cheaper than the “mid-high 4%s” than initially marketed
  • James Hay is funding its P2P of Nucleus with c. £200m of financing from Ares at L+600-700bp (for 5x leverage)
  • Heathrow: this was put in place last year but I only noticed it now: £750m of holdco PIK (subordinated to the HY) – appears to be instead of the shareholders actually putting anything back into the business.  Heathrow has 7 shareholders which is awkward: 1 or 2 shareholders are easy to manage, more than 20 is dispersed.  But having 3-15 shareholders makes it really hard to get consensus on valuation and investment appetite

Mike Beadle

Managing Director, Debt Advisory

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