Apollo-owned Lottomatica is set to pay up to reopen Europe's junk bond market, with the Italian gaming company planning a €350m fixed-rate five-year non-call two senior secured note to finance the acquisition of rivals. The deal is set to price on Thursday.
Volatility, rates uncertainty and escalating funding costs have clobbered euro high-yield issuance in 2022, and market participants were still gloomy about a potential reopening as late as last week. However, the early part of the week saw a shift in market sentiment, with the European corporate hybrid market reopening with the first benchmark bond in the product since early April, while second-tier peripheral banks featured heavily in the flow of transactions priced on Monday and Tuesday.
And while Wednesday opened on a weaker note following worse-than-expected US inflation numbers, the ICE BofA Euro High Yield Index closed at 402bp on Tuesday, almost 100bp tighter than it was when PrestigeBidCo, on behalf of German online retailer BestSecret, the last euro high-yield deal to emerge, priced.
Paying up
IPTs of 10% area were set on Tuesday, a banker with knowledge of the transaction said.
The yield on offer is "more than enough" to absorb any market risk, said an investor participating in the transaction, adding that the bond looks cheap given that he estimated fair value at around at 8.25%. He expects it to price tomorrow at low-mid 9%.
A banker with knowledge of the best-effort transaction said "orders books are looking good" given the issuer's supportive investor base.
Asked whether this would encourage other issuers to tap the market, he said that it is difficult to read across to other deals, as market conditions remain choppy and many chief financial officers would find current borrowing levels unattractive.
A second investor not participating in the transaction said the yield looked attractive but that he was nevertheless passing on the deal because of the sector and the fact that the issuer was owned by Apollo.
Still, he said there was cash on the sidelines to deploy and that he expected more bond offerings to follow from benchmark Double B-rated issuers if the deal went well.
“[It] appears quite generous and reflects the uncertainty and risk appetites of investors slowly venturing back to the primary market," said credit research firm CreditSights.
The additional debt issuance will increase the company's leverage by around 0.8 times compared with the first half of the year, but it will not weigh on its B2 corporate family rating, Moody's said.
The agency expects Lottomatica's pro forma adjusted leverage including Moody's inorganic growth estimates to be around five times or slightly less in 2022, well within the tolerance levels for the current rating, before falling below 4.5 times over the next 12–18 months.
The B2 rating reflects the company's strong current trading performance with continued high single-digit revenue growth in its online segment as well as the recovery to near pre-Covid volumes in its retail segments, it said.
The deal follows Lottomatica's sale through its parent company Gamma Bondco of a €400m five-year non-call two bond (Caa1/CCC+) in November 2021, months after its purchase by Apollo, to pay itself a dividend.
That 8.125% November 2023 deal was quoted at a 12.85% yield, according to Tradeweb.
Barclays and Deutsche Bank are global coordinators, while Credit Suisse, Goldman Sachs, JP Morgan and UniCredit are bookrunners.
Updated story: Recast with investor comments