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25 Nov, 2021
By David Cox
Potential jumbo sterling issuance backing the buyout of Wm Morrison Supermarkets PLC could yet top off a strong year for the U.K. currency across the European leveraged finance markets.
Timing of the mooted £5.4 billion debt financing supporting CD&R's take-private of the supermarket chain is still a matter of speculation, although investor sources reckon the deal could still emerge this side of the Christmas break. The acquisition closed in October, although Morrisons must be run as an independent business while the U.K.'s competition regulator reviews the sale.
According to documents released during the takeover bid, the drawn debt will be split between £2.4 billion-equivalent in secured bonds, £1 billion-equivalent in unsecured notes and £2 billion-equivalent in term loans. The currency split is not yet known, but investor chatter before launch suggests the borrower is aiming to maximize the sterling element of the high-yield portion, meaning the deal could end up as one of the largest U.K. currency bonds of the year. So far, rival supermarket group ASDA Group Ltd. holds that title via a £2.25 billion offer of 3.25% notes due 2026 that priced in February. The Leeds-headquartered group also returned in October, in a trickier market, to place a £500 million secured bond offering at 4.5%.
Record breaker
But whatever the final size of the Morrison bond, it will be coming in a record year for sterling high-yield issuance. LCD data shows that for the year to Nov. 23, sterling high-yield volume stands at €16.8 billion-equivalent, up from €9.1 billion in full-year 2020 and less than €5 billion in both 2018 and 2019. Meanwhile, the total share of European high-yield volume taken by sterling deals is running at 13.7%, which is the highest proportion since 2015.
Sterling issuance also made a strong showing in loans, where volume for the currency is €7.04 billion-equivalent for the year so far, up from €4.13 billion for full-year 2020. However, the share taken by sterling facilities across the entire European leveraged loan market has fallen precipitously over the past 10 years, from a high of 19% of all volume in the European Leveraged Loan Index at the end of 2013 to just 5.2% today. And despite the robust sterling volume this year, the share of total European loan issuance taken by the U.K. currency has also fallen amid a stellar year overall for this asset class, to just 5.5% of deals by volume. Back in 2010, sterling accounted for more than 30% of all loan issuance.
This decline in the share of sterling deals in loans reflects the inability of post-crisis CLOs to book the currency, and means these investors need a perfect swap to lend in sterling. Europe's loan market spreads beyond CLOs though, and large sterling tickets are possible even if bankers point out that tranches beyond £500 million or so can be tricky to sell. Among the larger sterling borrowers, CD&R-backed petrol station operator Motor Fuel Group has a term loan that stands at £765 million following an add-on earlier this year.
Support group
Sterling loan support is largely predicated on a small number of U.K. accounts and the draw of higher yields relative to euros or dollars, bankers explain. "We've been surprised at the high level of demand for sterling this year," said one banker at a top-tier arranging bank. "It's been a good year for this market," he added.
In October, Anglesey-headquartered builders' merchant Huws Gray Ltd. wrapped a £950 million-equivalent loan financing backing its buyout by Blackstone and founder shareholders. The deal included a £650 million tranche that priced at S+525 with a 0% floor offered at 99, for a B/B2 rating and a considerable premium to a £300 million-equivalent euro tranche that priced at E+400 with a 0% floor offered at 99.5.
The absence of a CLO bid does mean a more concentrated investor base, however, and this dynamic impacts secondary trading. Over in bonds too the dominance of big U.K. managers in final books can also impact liquidity, investors note, adding that it can lead to price spikes if they change their attitude towards a credit. "Books can be dominated by a handful of large U.K. fund managers who put the paper in their income funds, and this reduces secondary liquidity considerably," said one manager. Secondary is also in focus ahead of the Morrisons launch, with traders noting some recent underperformance in sterling high-yield ahead of the final deal.