Merlin Entertainments made its return to the European high-yield market last week, capitalising on strong revenue growth following the reopening of its theme parks to land an upsized €700m transaction.
The Blackstone-owned company, which was hit hard by global lockdowns imposed to control the spread of coronavirus, was back in Europe’s public high-yield market after a three-year absence.
“If you look back at the deal they did back in 2019, it’s always been a really well-liked credit in the market,” a banker familiar with the trade said, referring to a €370m eight-year non-call three note in October of that year that was issued alongside a US$410m bond with the same tenor structure. “Obviously, it was a business that was dramatically affected by Covid, having to be shut in 2020, 2021.”
But with reopenings now well underway, including Asia, the backdrop for Merlin has turned more positive. In fact, S&P upgraded Merlin’s CFR rating by one notch to B on May 22, putting it on a stable outlook.
It cited solid revenue growth, due to strong leisure demand, and an expected increase in international and regional travel, which should enable the group to sustain its improvement.
"The market for international and regional travel is predicted to increase by a compound annual growth rate of 5%, while its visitor numbers are still under 2019 levels. We see solid revenue growth during FY23 on the back of strong demand for Merlin’s services, on top of new openings," said Danilo Verzili, corporate credit analyst at Ver Capital.
Merlin, issuing through Motion Finco (B2/B+), was able to capitalise on the positive momentum, pricing the seven-year non-call three senior secured transaction at 7.375%, the tight end of the 7.5% area (+/–12.5bp) talk and upsized it from an expected size of €650m.
Still, while lead manager Deutsche Bank was able to move pricing tighter and inside where some investors saw value, some accounts voiced concerns around the credit’s exposure to what some see as an inevitable recession.
“A lot of the questioning was around the economic outlook and what that does to consumer demand, but you have the reopenings of attractions to offset that,” the banker said. “And if people maybe are cutting back, this doesn’t seem to be the case if you look at the trading through their Q1. But yes, if you’re going to worry about something, recession risk is the one.”
One high-yield investor said he had passed on the trade, saying his company was moving its portfolio to a better-quality profile towards Double B on average (considering the macroeconomic scenario) where there are still good yield opportunities.
Proceeds from the issue will be used to refinance the €500m senior secured notes due 2025 and for cash on balance sheet to address existing secured maturities.
Far from red hot
The deal emerged after a recent busy few weeks in the high-yield market and the banker said that while there was good participation in new issues, the market was still far from being red hot.
“If you look at the spectrum of deals that have come since Easter, all of those have had decent order books but nothing has traded up significantly,” he said. “Even if books have been three, four, five times covered, deals have maybe traded up to 100.50. So, I think what that tells you is that investors are willing to buy stuff at a price but won’t buy at a slightly tighter yield.”
Issuers that have needed to come to market have been able to, the banker said. “If you look at the better-rated deals, while the coupons are much higher than they were two years ago, the actual credit spreads aren’t that different. People aren’t having to pay a big spread premium,” he said.
For relative value, the references points for Merlin included the loans that were trading at 375bp–400bp credit spread for three, four years.
“So, if you do a new seven-year, add the swap rate and you end up at 7.375%, 7.5%. One or two [were] suggesting something in the 8s, but 50 [were] saying in the 7s. There wasn’t a huge divergence when you came to it,” he said.
Merlin Entertainments last issued in April 2020, printing €500m 7% May 2025s, which are callable next month at 101.75.