Shedding the LBO Albatross, China Debt Plans: Credit Weekly

(Bloomberg) — Editor’s Note: Welcome to Credit Weekly, where Bloomberg’s global team of reporters will catch you up on the hottest stories of the past week while also offering you a peek into what to expect in credit markets for the days ahead.

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With just three weeks left in 2022, leveraged finance bankers are scrambling to unload a $40 billion albatross: the risky buyout financings that they committed to when credit markets were booming but that their usual investors will no longer touch.

For some willing buyers, that has meant big discounts. Funds including Elliott scooped up €1.5 billion ($1.58 billion) of debt that underpins the buyout of Unilever Plc’s tea business at 82 cents on the euro. Apollo and Franklin got their hands on $750 million of Citrix buyout debt for 87 cents on the dollar. The banks financing gaming company 888’s takeover of William Hill International stuffed £347 million of debt through every channel they could, also at steep discounts.

And then there’s the roughly $12.5 billion pile of unwanted debt that financed Elon Musk’s buyout of Twitter. A group of banks led by Morgan Stanley are discussing the possibility of laying off some of the risk by providing new margin loans backed by Tesla Inc. stock that Musk would be personally responsible for re-paying. With banks looking to confine as much of their losses as possible to 2022, we’re likely to see more such maneuvering before the year wraps up.

China Progress

Nearly two years after China’s crackdown on leverage in its property sector triggered a wave of developer defaults, creditors are starting to see some movement on their long road to resolution. In what will be the biggest restructuring in the industry, China Evergrande Group was said to be huddling with a group of creditors to present a long-delayed debt plan. China Fortune Land Development is one step closer to completing a restructuring of almost $5 billion of offshore bonds. Sunac China Holdings unveiled a plan for restructuring its $9.1 billion in offshore debt. And creditors to Sinic Holdings Group Co. won a winding up order in a Hong Kong court, only the second developer to receive one.

Private Credit Tested

Blackstone’s $50 billion BCRED fund said this week that it hit redemption limits as investors pulled cash amid turmoil in global markets. It’s the first big test for the private credit juggernaut, and there are concerns that other funds targeting affluent retail investors could be next. But elsewhere in the $1.4 trillion market, money is still pouring in. Four of Australia’s top-10 pensions are significantly increasing allocations to private credit. And in Europe, Hayfin Capital Management is looking to raise about €6 billion for its fourth direct lending fund.

Battle Fatigue

An increasingly common trend in credit markets has been the side deals creditors have been willing to cut with corporate executives desperate to keep their companies out of bankruptcy. From J. Crew, to Serta Simmons, to Envision Healthcare, companies have found it relatively easy to pit creditors against one another to get emergency financing.

But this week brought a twist to that plot. The biggest creditors to troubled used-car dealer Carvana signed a pact binding them together in negotiations with the company, a deal intended to prevent the kind of splintering that has led to those nasty creditor brawls. It could provide a playbook as debt investors face a wave of distress in the coming months.

Elsewhere:

It was a mixed week for global credit spreads. Investment-grade corporates tightened for an eighth week globally while high-yield widened along with a drop in stocks. JPMorgan Asset Management’s Kelsey Berro warned on BTV this week that credit investors are being a bit too complacent.
Famous worldwide for “Squid Game” and boy band BTS, South Korea has now also gained notoriety for being at the vanguard of a new challenge for global policy makers: having to keep debt markets operating smoothly while battling inflation.
The bonds of at least 15 out of 72 emerging markets tracked by a Bloomberg index are trading at distressed levels, mostly due to concerns over the rising cost of everything including financing, and their currencies’ decline against the dollar.
Apollo Global Management priced the biggest bond ever tied to music royalties in a $1.8 billion securitization of royalty payments from assets including Genesis, R.E.M. and Rodgers and Hammerstein.
Given the spate of borrowers that have decided against calling contingent convertible bonds at the first opportunity, UBS’s decision to redeem its debt came as a pleasant surprise to investors. The bonds soared, and lifted the market for similar securities along with them.

–With assistance from Alice Huang, Catherine Bosley, Davide Scigliuzzo, Eliza Ronalds-Hannon, Dana El Baltaji, Silas Brown, Sonali Basak, Giulia Morpurgo, Claire Ruckin, Dorothy Ma, James Crombie, Jill R. Shah, Jeannine Amodeo, Gowri Gurumurthy, Kamaron Leach, Paula Seligson, Jackie Cai, Lucca de Paoli, Lorretta Chen, Lisa Lee, John Gittelsohn, Richard Henderson, Georgina Mckay, Amy Bainbridge, Dinesh Nair, Emma Dong and Charlie Zhu.