European new-issue markets may be up and running but sterling liquidity across bonds and loans remains uncertain, and this situation could offer an opportunity for private credit players to step in as borrowers consider their options ahead of a sizable maturity wall.
The sterling maturity wall in bonds peaks in 2025, one year ahead of the euro markets, as the market for the UK currency has been slow to restart in the wake of Russia’s invasion of Ukraine last year. Looking back at recent history, sterling primary issuance had a solid year in 2017, though activity was generally fitful after the 2016 Brexit vote, until a record-breaking year in 2021 driven by big-ticket LBOs such as the deal for Asda.
In loans, there is still roughly €19.1 billion of sterling paper left to address in 2024, which steps up to €37.7 billion in 2025 before peaking in 2027. Near-term requirements include domestically focused names such as ZPG, as well as sterling tranches from international UK- and European-based companies such as BCA, EG Group and Flora.
Liquidity is agreed to be deeper in bonds when compared with loans, and last month budget hotel group Travelodge printed a £550 million-equivalent two-part bond offering that included a £330 million secured fixed-rate portion. So far, that is the only pure-sterling high-yield deal to emerge in 2023, amid an increasingly limited market for the currency. “The market is clubby and tends to move together,” said one manager, adding this dynamic generally results in a binary outcome for deals.
Into the void
Strained public market liquidity has seen private lenders step in to fill the void, and in mid-May it emerged that The Access Group had agreed an £850 million add-on to its acquisition facility via a club of direct lenders. Given a ticket of this size for a new-money sterling name would be out of reach for a single loan or bond today, this would suggest there’s more comfort and deeper liquidity for the UK currency in the private market than can be found in the public space. “There is a historic opportunity for private credit to take market share in sterling borrowers,” confirms one private credit manager.
Lenders to Access included Arcmont, CDPQ and PSP Investments, and the financing closed oversubscribed as the group was earlier looking to raise roughly £500 million, as LCD reported in February. The deal also came on top of Access’ record £3.5 billion of European private debt financing agreed last year through a club of lenders.
The inability of CLO managers to lend in sterling means the buying base in loans is even more concentrated than in high yield. And so far this year, extensions from Safety-Kleen and Motor Fuel Group are the only deals to have cleared the market.
In this environment, other companies have opted to exit the market entirely. In April, for example, Onex-backed Parkdean Resorts refinanced its sterling syndicated loans through an Ares-provided transaction. That deal came after an M&A process last year failed to bring a buyer, but also when it became clear that much of the existing lender group was ready to exit the name, sources add.
Similar to their high-yield counterparts, sterling loans had a relatively strong 2021 — though volumes were still below historical post-GFC highs. “We have been traditional holders of sterling loans, but the market has become so thin we would rather no longer participate,” revealed one manager.
Counting the cost
In syndicated markets, sterling financing also comes at a cost. For loans, this illiquidity premium can push yields to levels that attract non-traditional buyers, and these investors have been seen in secondary at various points this year. “There have been clear cases of dual-currency names where a sterling tranche has priced multiple points below the euros,” said a manager. “This presents a huge relative-value opportunity for those that can take advantage.”
ZPG is a case in point, and the year opened with the UK tech firm’s L+475 sterling loan trading at a nearly 10-point discount to the group’s E+375 euro loan in the secondary market. This level attracted buyers from value-focused funds, and the gap has closed to roughly a point, with the euro tranche quoted at 95.25-bid in mid-May.
For new deals, sources reckon both bonds and loans require a premium of at least 1.5-2 points over euro margins, along with further OIDs. In the case of MFG, the CD&R-backed petrol station group wrapped its sterling loan extension at SONIA+600 offered at 96.5, against E+475 and 97.5 in euros.
For those looking to hedge with euros, the swap cost is put at roughly 130 bps, which makes up for the differential between SONIA and Euribor (the Eurozone and UK policy rates are running at 3.25% and 4.50%, respectively). For MFG, this left a roughly 150 bps premium (on an all-in yield basis) on its sterling facility over four years when compared with the euros.
In high yield, Travelodge priced its £330 million fixed-rate bonds at a yield of 10.625%, versus a euro floating-rate portion that came at E+550 and 98. Using a five-year forward rate, this pricing suggests an all-in yield of roughly 8.7%.
The UK hotel chain came to market on the back of record earnings for 2022, and was refinancing 2025 notes which were prior to launch quoted in the high-90s. For other domestically focused names with bonds maturing that year such as Iceland Foods, Talk Talk and Stonegate Pubs, refinancing looks like a trickier prospect altogether. For credits like these, sources note that the underperformance of the post-pandemic British economy adds a further complication to discussions. “We like the premium for sterling, but we don’t like the UK,” said another manager.
Bankers say discussions are ongoing for all these situations, and point out that deals like Travelodge and Access Group demonstrate a core bid for sterling risk. Sources however concede that this alone might not be enough to address the sizable maturity wall of bonds currently quoted at distressed levels.
“It’s always been the case that the sterling market consists of a concentrated group of investors whose support will be needed,” said a banker at a UK lender on the high-yield refinancing task facing sterling borrowers. “Like euros, the size of the high-yield market is likely to shrink in sterling and we might need to see other sources of capital step in.”
Private lessons
For private credit, sources note that direct lenders are in the main currency neutral, and generally — though not always — do not charge a premium for sterling. Pricing for Access’ latest add-on is understood to be around S+650, according to sources, which compares with roughly S+575 on last year’s deal that was split between a £2.3 billion unitranche and £1.2 billion acquisition facility, sources add.
But syndicated sources caution that private credit has traditionally been highly selective when it comes to sector, meaning more difficult deals in areas such as retail or bulk chemicals have struggled to find a bid. That said, a lack of overall supply could push direct lenders to widen their purview, managers suggest. “There are just not enough deals in healthcare or tech to satisfy the market, and lenders are going to have to look beyond the same so-called resilient sectors that everyone is chasing,” said another manager, who added that a European retail credit is among those under consideration on their desk.
Even so, the levels charged by direct lenders represent a big step up in the cost of funds for existing sterling borrowers when compared with pre-invasion syndicated pricing. This consideration is likely to be front and centre for many sterling borrowers — especially for those that face significant maturities in 2025.
Some of these situations will be dealt with through M&A activity. Sponsor Partners Group, for example, has put UK public sector software firm Civica up for sale ahead of 2024 maturities, while others may look at avenues such as increased use of euros or using cash to reduce leverage. “I think sterling borrowers are looking at various options to manage their capital structures,” said one banker. A manager agreed: “There is likely to be an increased use of euros,” he said.
More borrowers, however, will follow The Access Group and Parkdean out of the syndicated markets, and new M&A transactions for sterling names will increasingly look towards private credit financing, managers argue. “As private credit markets continue to reopen and pricing continues to stabilize, we can expect demand to continue for euro- and dollar-denominated loans, and can also expect a concomitant increase in sterling demand to reflect increased transactional volume in the UK and the likely financing of equity-funded acquisitions,” said Aymen Mahmoud, partner at McDermott Will & Emery.
“We have already seen examples of some very large sterling acquisitions and private credit financings undertaken in the mid-market, showing the appetite for these businesses,” he concludes.
Featured image by FrentaN/Shutterstock
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