7 Min Read
* Investor demands on covenants derail deal
* Pulled bond follows pushback on other issues
* Banker says high-yield market still open (Adds further background and quotes)
By Robert Smith
LONDON, July 22 (IFR) - The Winoa Group will not proceed with a planned bond deal, after investors pushed back on the transaction's structure in the clearest sign yet that sentiment in the European high-yield market is turning.
"Earlier in the year we are sure this deal would have enjoyed a successful launch, but clearly the synergy of borrowers meeting overwhelming investor demand has now peaked," said Gary Kirk, a founding partner of TwentyFour Asset Management, in a note published on Tuesday.
Winoa had been targeting a 260m six-year non-call two senior secured deal to refinance debt put in place when the business was acquired by a KKR-led consortium earlier this year but will not proceed with the offering, according to a banker close to the trade.
This is the first time this year that a deal has had to be pulled in the red-hot European high-yield market, which is on course to smash the record volumes seen last year. While Greece's Yioula Glassworks postponed a deal in February, it was still at the pre-marketing stage and the deal returned successfully in May.
Europe has seen US$88bn-equivalent of speculative-grade bond issuance so far this year, Moody's said last week, predicting that volumes would hit a record US$130bn by year-end.
However, investors have complained about worsening covenant quality as demand for the asset class has intensified, and recent poor performance in the secondary market has seen them push for stronger terms on recent deals.
The Winoa transaction was pre-marketed to certain anchor investors ahead of its public roadshow that began on Tuesday July 15 and ran through to last Friday.
The investors said on Monday they were demanding structural changes to the deal including a lengthening of the non-call period to three years, while one investor said that the 10% cash call provision would be scrapped.
Another investor said that tweaks had been made to the deal's portability clause, a feature that allows bonds to stay in place if a business is sold.
The company, which was formerly known as Wheelabrator Allevard, has a chequered credit history and emerged from a restructuring in January. Several investors said this made the bond a difficult sell, particularly given a high 4.7x net debt to Ebitda multiple.
The banker said the increasing number of covenant changes coupled with worse pricing as the market deteriorated led the issuer to hold off.
"While price expectations were worsening, in the end, it was the structural changes that proved too much," said the banker.
"Anchor funds started asking for a lot of covenant changes, and as this was an opportunistic trade it made sense to hold off."
Although official price talk was not set, one investor said leads were whispering the deal at a yield of 8.5% area on Monday afternoon. This had crept up from an 8% area pricing level heard by three investors that morning.
The company is 51.6% owned by KKR, according to the deal's documentation, with US hedge fund Davidson Kempner Partners owning 20% and Bennett Management Corporation owning 13.6%.
KKR had been buying Winoa's debt on Europe's secondary loan market for some time before it struck a deal to take over the metallic abrasives company from LBO France, RLPC reported last year.
"The new owners have only been around for six months, so they think they'll be able to make a difference operationally and then come to the market later at better terms when they've established a track record," said the banker.
Investors were concerned by the speed with which the new owners have attempted to refinance the company. One said the deal reminded him of Gala Coral's 2011 bond, which came to market less than a year after the group's mezzanine lenders wrested control of the business.
He said that the price of the new bond was unlikely to be a determining factor for the group's shareholders.
"The guys getting taken out here took an equity stake by buying the loans for pennies on the euro, so what do they care what the price bond comes at?" he said.
A second investor said the short period of ownership sparked the renegotiation of the deal's portability clause. The clause originally had a 5.2x gross leverage threshold, he said, but was changed to a 4.5x net threshold.
A number of deals in the European high-yield market have faced resistance from investors in the past few weeks, although Winoa is the first to be pulled outright.
Last week, Italian fashion brand Twin-Set Simona Barbieri rewrote terms of a new FRN to offer investors more upside. The issue's non-call period was extended and the first call price upped, while the deal also priced at an original issue discount of 99.
On July 18, French jewellery chain THOM Europe scrapped a planned FRN tranche of a 345m deal, although it was able to increase the fixed-rate tranche to compensate.
"Investors are getting picky, but you shouldn't necessarily draw conclusions from this for the whole market," said the banker.
"Winoa was a relatively tricky credit and a small deal. The market is still open, as Adler Pelzer and Pizza Express show."
Adler Pelzer set price talk on its new bond on Monday and is due to price on Tuesday. Pizza Express meanwhile begins its roadshow for a new GBP610m three-tranche LBO deal on Tuesday.
Notably though, Pizza Express is employing a more generous non-call structure than some recent deals. Loxam priced an eight-year non-call three unsecured bond last week, but Pizza Express is opting for an eight-year non-call four structure on its unsecured tranche.
TMF Group has also announced a small tap of its outstanding senior secured FRNs and senior notes on Tuesday, with the latter carrying Triple C ratings from both Moody's and S&P.
One syndicate banker also said a Central European telecoms firm is expected to launch a new deal later this week. (Reporting by Robert Smith, Editing by Helene Durand, Julian Baker)