Few signs of primary market recovery, even as Mallinckrodt ventures in

12 March 2020
Mallinckrodt is the first borrower to test the high yield bond and leveraged loan markets in over a week, after several issuers postponed deals or withdrew from the market entirely. But the drugmaker’s deal does not mean debt markets are open again, said six buyside and sellside sources.
 
Within the last two weeks, borrowers including AlkermesAdvantage Solutions and PPD have pulled deals. The loan offerings that remain, including Thryv and Tata Chemicals, appear to be on hold, and Del Monte Foods—the only issuer currently pursuing a bond deal—missed its pricing deadline on Tuesday.
 
On Wednesday, however, pharmaceutical company Mallinckrodt launched a new loan and bond offering to refinance debt. The new-money deal comes alongside an amendment of its existing facilities, which will permit the new debt raise and allow Mallinckrodt to enact its opioid settlement program.
 
But that doesn’t mean the primary market is open again, market sources said. A leveraged finance banker characterized Mallinckrodt as an “anomaly” because of its looming opioid settlement, while a buysider said borrowers would be “crazy” to launch new deals in the current environment.
 
Indeed, most sources were of the opinion that the debt markets could be closed for some time. Equities officially entered a bear market yesterday (Wednesday)—meanwhile, the average loan bid has fallen 5.71 points since 21 February to 90.33, and the average spread of HY bonds over Treasuries has widened 295bps points to 6.61%.
 
“People radically underestimated this in terms of the impact on funding markets,” a buysider said. “It’s going to be a long time before people are allowed to come back.”
 
The recent primary slowdown is a stark turnaround from the beginning of the year, when red-hot investor demand enabled borrowers to flood the markets with opportunistic deals such as repricings and dividends.
 
Issuers have sold USD 68m worth of new high yield bonds so far this year, compared to just USD 40m by this point in 2019. 
 
And borrowers have raised USD 155.17bn worth of leveraged loans so far this year, some USD 115.3bn of which is with institutional investors, according to Debtwire Par. That compares to USD 132.62bn through 12 March last year, of which USD 57.91bn was with institutional investors. 
 
However, as markets continue to sell off, nearly all of the leveraged loans priced in 2020 so far are now trading below their OIDs—some by a significant margin. High yield bonds have also traded down significantly.
 
The silver lining is that the bull run for credit has allowed many leveraged borrowers to push back their maturity profiles. Just USD 13.75bn of leveraged loan—roughly 1.2% of the entire market—mature in 2020, while USD 41.9m, or 3.6% of the market, mature in 2021, according to Debtwire Par.
 
“I don’t see lot of borrowers facing a maturity wall,” one buyside portfolio manager said. Meanwhile, any issuers that need to access the markets, whether to take out upcoming maturities or for other reasons, must be ready to tap moments of calm, leveraged finance bankers said.
 
In addition to the impact of the coronavirus pandemic on market conditions, the practical aspects of bringing a deal to the primary market are becoming challenging, noted analysts at UBS. 
 
"First time and lower rated issues may struggle to access capital in an environment where financial models are being re-calibrated, roadshows are sidelined, and face-to-face interaction between issuers, investors and credit risk officers is challenged," the note said.
 
When markets do stabilize, the high yield bond market—where issuers can price drive-by deals in a single day—will likely be first to reopen, the sources noted. The leveraged loan market, meanwhile, will likely need at least a week of relative stability since those syndications take longer.
 
“People will have to be more tactful and take advantage of day-to-day windows versus months-long windows,” a banker said.