Finastra term loan drops on downgrade; Michaels a little weaker with ratings cut

By Sara Rosenberg

New York, Oct. 14 – Finastra Ltd.’s (Misys) U.S. first-lien term loan experienced a significant decline in trading levels on Friday after its ratings were lowered by S&P Global Ratings, and Michaels Cos. Inc.’s term loan was slightly lower following its ratings downgrade.

Finastra falls

Finastra’s U.S. first-lien term loan weakened to around 80 bid, 83 offered on Friday from around 86 bid, 87 offered on Thursday after the debt and the corporate ratings were lowered to CCC+ from B- by S&P, a trader remarked.

The rating agency said it lowered Finastra’s ratings because of the belief that its capital structure is unsustainable, indicated primarily by weak free cash flow, persistent double-digit leverage, and large debt maturities in the next two years.

In addition, the company was assigned a negative outlook to reflect the risk that ratings could be lowered over the next 12 months if Finastra does not extend or refinance its revolver and first-lien term loan maturities before they become current.

Finastra’s $385 million cash flow revolver, of which $310 million was outstanding as of Aug. 31, expires in March 2024, and its $4.1 billion first-lien term loans mature in June 2024.

Finastra refinancing risk

According to S&P, Finastra will likely be able to refinance or extend the maturities of its debt at least temporarily, because of the strength of its business. Finastra currently pays Libor plus 350 basis points on most of its first-lien term loans, but the company is expected to have to pay a meaningfully higher margin on any refinanced debt primarily because of higher spreads due to generally unfavorable market conditions. S&P estimates this could increase the company’s cash interest expense by $50 million to $100 million per year, which would continue to suppress cash flow.

Assuming interest expense will increase and taxes will increase in 2023 as pandemic-related tax relief ends, Finastra will generate only modestly positive reported free operating cash flow in 2023 relative to its nearly $6 billion of funded debt and $1.5 billion of preferred stock, the rating agency continued.

S&P went on to say that in order to fully fund the mandatory debt amortization payments on its term loan, Finastra will remain reliant on its revolving credit facility or existing cash balances to cover the shortfall.

Finastra, formerly known as Misys, is a London-based financial software company.

Michaels dips

Michaels’ term loan was quoted at 80 1/8 bid on Friday, a touch weaker from Thursday’s levels, sources said. One source had the loan at 80¼ bid on Thursday and another source had the loan at 80½ bid, 82 offered on Thursday.

On Friday, S&P downgraded Michaels’ term loan and issuer credit rating to B- from B, with a negative outlook.

The rating agency said that the downgrade reflects Michaels’ very high leverage, significant cash outflows driven by high transportation costs, and expected weaker economic backdrop.

S&P expects Michaels’ leverage to be very high before improving in 2023 as freight pressure relief is offset by a weaker economic backdrop given our base case assumption of a shallow recession.

The negative outlook reflects that S&P could lower Michaels’ ratings over the next 12 months if the company does not demonstrate material improvement and prospects to generate sustainable, meaningfully positive free cash flow.

Michaels is an Irving, Tex.-based retailer of arts and crafts supplies and home decor products.

Secondary stronger

In general, the secondary loan market was a bit firmer on Friday, with one trader estimating that names were up by about an eighth of a point to a quarter of a point on the day and another trader estimating that names were unchanged to up an eighth of a point on the day.

The first trader attributed the general strengthening to a $280 million OWIC on Friday that was “a CLO ramp”.

Fund flows

In other news, actively managed loan fund flows on Thursday were negative $218 million and loan ETFs were negative $75 million, sources said.

Loan funds reported weekly outflows totaling $1.09 billion. ETFs were negative $189 million.

The past eight weeks’ outflows for loans total $9.6 billion equating to 11% of weekly AUM, sources continued.

September was the fourth largest outflow on record for loans at $6.7 billion, behind $15.3 billion in December 2018, $13.4 billion in March 2020 and $7.4 billion in December 2014.

Net inflows for loan funds since the beginning of 2021 are down to $45.4 billion.

Outflows for loan funds year to date total $2.1 billion. ETFs are negative $3.1 billion.

Loan indices retreat

IHS Markit’s iBoxx loan indices declined on Thursday, with the Leveraged Loan indexes (MiLLi) closing out the day down 0.21% and the Liquid Leveraged Loan indices (LLLi) closing out the day down 0.24%.

Month to date, the MiLLi is up 0.43% and year to date its down 3.22%. The LLLi is up 0.70% month to date and down 4.13% year to date.

Average secondary market bids in the U.S. on Thursday were 92.33, down 0.12% from the previous day and down 4.67% year to date.

According to the IHS Markit data, some of the top advancers on Thursday were Gopher Resource’s March 2018 covenant-lite term loan B at 81.80, up from 76.50, Heritage Power’s July 2019 term loan at 34, up from 32.80, and Imperva’s January 2019 covenant-lite term loan at 83.25, up from 81.

Some top decliners on Thursday were Clarion Events’ February 2018 covenant-lite term loan B2 at 69.67, down from 75.75, Arctic Glacier’s March 2018 covenant-lite term loan B at 85, down from 87.85, and Genesis Care’s March 2020 U.S. covenant-lite term loan B at 38, down from 39.

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