'Three Things About Debt' 13 June 2025

A new beginning!

One thing first: I definitely have not left Deutsche Numis just to start a substack! I know there are plenty who make good money from subscribers paying for their thoughts; ex-CS analyst Zoltan Pozsar’s entry ticket is $30k p.a.! But I’m not one of them: this is just to keep me on the ball before I start my next role (more news on this soon).

Image credit: Pigment Productions

I paused TTAD after Deutsche Bank acquired Numis, partly because I was less sure of the compliance environment but also because Deutsche Bank houses many excellent financing teams and I didn’t want to antagonise my new colleagues by disparaging their deals. I’m still compliant and I still don’t want to annoy anyone, but what’s the use of freedom if you don’t use it?

What are debt markets doing?

I’m certainly not sitting on my hands but I’m maybe not quite as busy as the wider debt markets. Investors have quickly tired of Trump’s tariff hokey-cokey and markets have been resilient enough for many issuers to pull forward deals originally slated for September.

As a reminder, currently global tariffs are due to be reimposed on 8th July, following the 90-day pause - so why not go now? And so a busy June has followed a record May, the 5th busiest month ever for European debt markets. That said, the escalating conflict in the Middle East could well lead dampen appetite.

Credit spreads have recovered most of April’s widening; £BBB bond spreads are 130bp, about where they were in Dec-24 (itself the lowest spread for over 10 years) leaving all-in yields at the bottom of the 5.5-6% range seen since Jan-24.

Euro leveraged markets remain short of new supply, with European M&A Q1 volumes down about 25% on prior years. This means that investors are being forced to accept lower margins on existing loans via repricings, with performing deals now commanding E+ 350-375bp.

But I’m not really trying to produce a ten-a-penny market update; instead I’m supposed to be telling you something interesting and / or funny about debt. So here we go.

1. RTFD

My eldest son is approaching the end of his A-levels now and is greedily eyeing up 3 months of summer holiday interrupted only by the horror / glory of results day (I will let you know which in August).

The best exam advice I ever received was “Read The F… Question” (wonderful discussion here on Mumsnet as to whether the F stands for “Full” or something else)”: you can’t answer a question that you haven’t read properly.

The corresponding advice for creditors might be RTF Documents. Finance law is so remunerative because the docs are designed to anticipate so many potential outcomes. So it is surprising when one party pays less attention to the key economic clauses than the other side, as seen in the the latest litigation about Greek bonds.

Almost 13 years ago (but still seemingly only yesterday), Greece restructured its debts: private investors took a about a 50% haircut (= what my middle child had last week with his new mullet) and received some GDP warrants that pay out according to whether future Greek GDP exceeded hurdles. I can’t find the full terms in English so I will accept this evaluation as “mind-boggingly complex”.

Like an earn-out or Contingent Value Rights, these warrants were added to bridge a valuation gap in negotiations - though at the time, most market participants thought they were a worthless ornament on the deal.

Wind forward to today, and Greece has exercised its right to repurchase the warrants for 25c when booming GDP means the fair value might be >€1. The repurchase price is contractually determined as the 30-day average trading price - but crucially the price on on the Bank of Greece’s own exchange rather than the much more liquid London OTC market, where the most recent trading price was about 38c.

Investors disagree and the matter is heading to court in London, though it seems unlikely English judges will overrule clear contractual provisions. I can recommend this podcast if you’re really into the detail.

2. Little boxes

Perhaps because I’ve moved house twice in the last 12 months, I can’t help but see little boxes everywhere. Not these ones or these ones but corporate structure charts.

Equity investors generally only have one share class / price (of the ultimate topco)¹, but debt investors can face multiple bond-issuing entities for the same business. Some big issuers like GSK use PLC, Inc and BV issuers but all bonds rank equally via guarantees. However, structured finance was invented to provide bondholders with a menu of pick & mix rankings, so you can accept being more junior for a little extra yield.

Lending to a holding company (structural subordination) is one of the most important ways in which debt investors can be more junior, in return for a little extra yield.

Thames Water provides a good example of the risks of accepting structural subordination. In 2020, its holdco Kemble issued some 4.625% bonds which are currently priced at just 1p/£, little more than option value. When these bonds were issued, investors could choose from:

• Class A bonds at G+200bp (rated BBB+)

• Class B bonds at G+275bp (rated BBB-), or

• Holdco exposure at G+450bp (rated B-)

I’m not throwing shade on the holdco lenders but I would respectfully suggest that a 250bp premium wasn’t enough juice for taking on highly-leveraged equity risk.

There will be plenty of opportunities to come back another time to Thames Water, and probably Southern Water too.

It’s not just that being a holdco creditor is risky, but that the risk of default is subject to ‘cliff edge’ jumps rather than the normal steadily increasing chance of default as stress increases.

For example, cash flow to service holdco debts can only come from operating company dividends, additional holdco debt or shareholder equity injections from shareholders. But these sources of funds can disappear in an instant:

• Both senior debt docs and regulation contain triggers for a ‘dividend block’, leaving the holdco reliant on its own liquidity for paying coupons;

• Any further debt or equity is entirely subject to the whims of investment committees;

• If directors of the opco believe insolvency is likely then they must start to put creditors’ interests first; once insolvency is inevitable then shareholders are out of the picture, leaving any debt at that shareholder level in trouble.

Notably, all these debts are described as “senior” and many of the holdco borrowers include the name of the regulated entity, despite many layers between the assets and the debt. Packaging matters for selling debt, just as it does for whisky, 7UP and margarine.

3. The non-payment that didn’t default

OK, so a slightly convoluted tribute to Sherlock Holmes, but there is growing evidence of increasing unplanned use of Payment In Kind (PIK) for private credit - which is an indication of unmanageable borrower stress.

While European private credit remains, well, private, publicly-listed investment companies (“Business Development Companies” or BDCs) provide a window into the US market. These are basically REITs for private credit: permanent capital that pay no tax if >90% of profit is paid as dividends.

Most BDCs are sponsored by the big private credit funds like Ares or Blackstone and anecdotally their portfolios are representative of the wider funds run by these managers. So data on BDCs sheds some light on the wider industry.

Sometimes it’s expected that a borrower may choose to PIK some interest e.g. significant investment may mean a reduction in free cash in the short-term. But according to Lincoln Intl, 6% of deals have now had PIK options added months / years after signing - so-called "‘bad PIK’; this is up from only 2% of deals in 2021. Lincoln notes dryly that when Bad PIK is implemented, these deals have an average LTV of 86% , compared to an initial LTV of under 50% .

If a borrower isn’t paying interest then this used to be a ‘real default’, as opposed to ‘technical defaults’ which are breaches of non-payment obligations. Pretending that the interest was never due and can be rolled-up might enable managers to avoid uncomfortable questions from their LPs.

Selected UKish deals in the past two weeks

• IG Bonds

  • Associated British Ports 12Y £300m (Baa2 / A-) at G+118bp, tightened from +140bp at launch

  • SSE €800m Perpetual Hybrids (Baa3 / BBB-): NC5.25 years at 4.075% and NC8 years at 4.55%. Both priced c. 75bp tighter than initial price talk

  • Informa: 6Y €700m (Baa2 / BBB / BBB) at mid-swaps +118bp, tightened from +155-160bp at launch

  • London Power Networks: 12Y €500m green bonds (A3 / A- / A-) at ms+123bp, in from +155-160bp at launch

  • Severn Trent: NOK1.35bn (c. £100m) EMTN private placement (A-) at 5.297%. Relatively unusual but shows how high-quality UK watercos can benefiting from a diversified funding platform

  • Hiscox: 11Y non-call 10 $500m Tier 2 bond (BBB-) priced at 7%, in from 7.5% at launch

• HY bonds and leveraged loans

  • Ocado: privately-placed £100m tap of its 11% 2025 notes (B- / - / B3) to fund a repurchase of its convertible bonds

  • SMBC has underwritten a £575m add-on for Apex’s WGSN for its acquisition of IWSR, consultant to the drinks industry. That sentence has way too many four-letter acronyms …

  • Lead banks are looking at direct lenders for the £500-700m Sterling parts of the Walgreens Boots Alliance acquisition financing. The rest of the $19bn financing will be syndicated in July into the ABL, private credit and TLB markets

• Corporate loans

  • Premier Foods tapped its accordion by c. £60m

  • DAZN finally wrapped up syndication of its A$1.8bn loan to acquire Foxtel that was underwitten in December and launched to syndication in February. Terms were flexed in April by adding 45-100bp to term loan tranches

  • Mitie arranged a £240m bridge loan for its cash and shares offer for software and services firm Marlowe. Final maturity in 2 years with margins starting at 120bp and stepping up to 325bp after 18 months. Lloyds and NatWest provided this

  • PayPoint increased its term loans by exercising the £30m accordion and agreed a +1 extension

  • Johnson Matthey renewed its £1bn 5+1+1 RCF with 14 banks

  • Rosebank (Melrose MkII) entered into $900m 3+1+1 facility to back its £1.9bn acquisition of Electrical Components International. Margins are 170bp for the $400m term loan and 210bp for the $500m RCF.

• Other

  • Spectris announced it would recommend an offer from Advent if this were firm - although KKR is trying to gatecrash this. With an take-out EV of >£4bn, this would be one of the larger UK take-private deals in recent years, with a lot of new-money leveraged debt to be underwritten

  • Alphawave’s acquisition by Qualcomm will be funded by existing cash, so nothing needed from the market. The bid will give a little bonus to Alphawave’s convertible bond holders (only issued in Dec-24) as the conversion price will be reduced as compensation for early repayment

  • Assura received an increased “best & final” offer from KKR, slightly higher than PHP's mostly-equity bid. This will test whether institutions really do want to remain invested in the UK markets. If KKR is successful then it will also remove c. £500-700m of debt that PHP would need to be syndicated

1. Yes, I know there are exceptions e.g. Informa PLC (INF LN) and its 58% owned subsidiary TechTarget, Inc. (TTGT US). And let’s not get started on someone like Liberty Global or Liberty Media, with 3 classes of equity and an ever-changing number of tracking stocks