Instead of a return to robust activity the consensus among arranging banks suggests a slow and gradual return to business in the high-yield market.
“It now looks like not a lot will happen in September. Nothing has changed since the crisis began and there is no new liquidity,” according to one senior investment banking source.
That sentiment is shared by David Bassett head of loan markets at
Institutional investors are sceptical of even such limited optimism. “The situation looks somewhere between disastrous and really bad,” said one.
Bookrunners, however, stressed that rather than wait for the market to reignite spontaneously, they have been active through the summer looking to find new ways to get deals done. And one way is to find new investors.
According to bankers, conversations are on-going to find new investors. “The buckets of liquidity that sustained the market in the first half of the year are gone,” said one, “and leads are now looking at other buckets that were overlooked previously.”
Such previously under-utilised liquidity pools could well be receptive to paper now available at prices and terms unthinkable in the last quarter. But in terms of scale, such sources cannot replace the CDO and hedge funds that are no longer in the market.
“Even where a deal is attractive, there is still a maximum deal size of around €1bn,” said one investor. That more than anything reflects the depth of the failure to bounce back towards boom conditions. For arranging banks, the question is no longer how to return the market back to the way it was, but how to do deals in the market as it has emerged.
Over-hang
Impeding arranging banks’ ability to adapt to the new reality is the huge overhang of debt already on their balance sheets. Indeed, there is broad agreement that deals structured to reflect market conditions in the spring will still struggle to sell, even with extra fees or initial offering discounts.
“The investors who would be amenable to discounting simply do not have the liquidity. Paper has to go to banks, which means it is not a price issue but a credit issue,” according to one investor.
“I have a sense that arrangers are trying to rejig the balance of junior to senior debt on those already underwritten deals in order to make the senior less horrific-looking,” he added. “But the crux for the underwritten deals is that more cash pay debt, which would make them more palatable, cannot go in without risking the credit falling over down the line.”
Flexing options tend to be limited to price and marginal structural adjustments and will not allow for changes as radical as putting in new amortising tranches. Added to those difficulties is the sheer size of a number of deals, which are simply too large to sell down in the current climate.
One bookrunner summed up the attitude, saying: “Almost every deal is attractive from a credit standpoint, the problem for leads is the imbalance between supply and demand. There is no doubt that banks would prefer to lighten their holds but they will continue to resist selling good credits at crazy prices.”
That decision is the least-worst option for some banks. “Fire-sales would not only impact on leads’ own P&L, they would flood the market and exacerbate the problem. Leads will favour a slow, controlled, flow of new deals rather than sell paper into a fear-driven market,” adds David Bassett. There is no sign that position will shift until well into the second half of the year.
New deals
Despite the credit market hiatus, sponsors continued to announce new buyouts through June and July but the new market reality means smaller deals with less aggressive structures.
“New deals are going to be different – rather than super-jumbos we are going to see moderately sized deals,” said one banker. “New deals will have big amortising slugs and smaller bullets and pricing will be in line with what it was 18 months ago.”
“Those deals that do get done in September will be done mainly with the bank bid. That means credit and relationships will be key drivers, more so than price,” according to another. That is good news for those investors who do have the liquidity to invest.
“New deals will prove interesting because they are going to have to come at a price that matches the yield available in the discounted secondary market,” he said, but pressure on pricing could undermine the market further as it begins to impinge on sponsors.
“Sponsors are not going to want to pay 350bp–375bp for senior debt or 9.5% to 10% for subordinated debt,” mused an investor.
For bigger loan deals, arrangers are changing their approach to the investor market.
“The sell-down process is changed – instead of large-scale invites you will see a more carefully managed and controlled process, a more private and relationship driven market than had been the case,” says Bassett.
“Leads are also changing their approach to investors, for example instead of approaching a potential investor with one deal leads are offering three or four together,” he adds, highlighting the sea-change for leverage finance arrangers.
Indeed, across the leveraged space there is an acceptance that the move into autumn will not trigger an automatic return to form for the market.
Bassett acknowledges the shift in attitudes, saying: “Bankers have adjusted to the situation, certainly compared with July, when eyes were going to the crossover iTraxx every 10 minutes to try to read the situation. There is now an acceptance that this is the way things will be for a while. Leads who have the patience and the capital strength are focusing on relationships and on fundamentals, and on working to move paper.”
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