Gala gambles on high-yield bond refinancing

LONDON: Gala Coral's planned high-yield bond is set to be a key test of risk appetite as investors make a bet on whether new management can turn the business around less than a year after its lengthy restructuring was completed.

The gambling group is the latest in a string of companies with riskier credit profiles seeking to refinance bank debt in the bond market, and like many of those before it, the bond market is their best or only option.

Gala's two-part 625 million pounds ($1 billion) bond, which has already been cut and revised after pushback from investors, will determine whether a broader 1.55 billion pounds refinancing can get done.

"The bond market has been crucial for a lot of these issuers lately. If they can't get them done, it's back to the bank with cap in hand and penal charges," said one high-yield bond investor.

Books on Gala's bonds were due to close last week, but the deadline was extended to 1500 BST today after the leads last week increased the size of the term loan B component by 25 million pounds to 825 million and the size of the senior secured bond by 100 million pounds to 350 million.

The changes pushed secured leverage on the loan component to 4.2 times from 3.9 times EBITDA, a high-yield banker working on the transaction said.

"We had to ask the banks in the loan to reconfirm their commitments and they don't do that in two hours' notice. That is why we had to move the deadline to Monday," said the banker.

Price talk on the B2/B+ seven-year senior secured bond, callable after three years, has been set in the 8.75 percent area, and in the 11.5 percent area on the 275 million pounds eight-year subordinated tranche, which is rated Caa2/CCC+ and was downsized from 400 million pounds.

Investors said global co-ordinators Barclays and Credit Suisse had initially put guidance at around 9 percent for the subordinated bond.

Gala was taken over by mezzanine lenders last June, leaving its private-equity backers empty handed.

Although the lengthy restructuring reduced Gala's debt by 700 million pounds, investors argue that leverage is still too high at around 6.6 times earnings at the senior debt level on a lease-adjusted basis, another fund manager said.

"Gala is a really tricky deal, because you are really buying into a story and whether the business can be turned around after years of mismanagement," said the first investor.

New leaders have been put in place, with well-respected retail expert Carl Lever taking the helm as chief executive officer and former Debenhams Chief Executive Rob Templeman as non-executive chairman.

The company is also in talks with software developer Playtech, which would help it to improve its internet business.

"The problem is that these plans will not kick in for another 12-24 months, so it all seems to be on a bit of a wing and a prayer," said the investor.

Red-hot demand for high-yield assets has come to the rescue of several issuers of late, resulting in more than 24 billion euros of supply year-to-date and expectations that last year's record volume of 42 billion euros will be smashed.

The main difference this year is a greater number of inaugural issuers of lower credit quality and an increasing number of companies seemingly bailed out in the bond market as banks looks to reduce their lending further.

UK budget clothing retailer Matalan, for example, in April raised 250 million pounds via a 250 million pounds five-year bond, which meant it avoided a potential breach of its covenants. German defence contractor Heckler & Koch's 295 million pounds seven-year bond was also seen as a "make or break deal", the investor said.

The trailing 12-month European high-yield default rate remained as low as 0.7 percent in the first quarter, but that is expected to climb towards the second half of this year and into 2012 as new issuance continues to reflect riskier credits, according to Fitch.

"Borrowers in challenged sectors or with high leverage have few cost-effective funding alternatives given declining risk appetite for loans from Europe's de-leveraging banking system," said Edward Eyerman at Fitch.

The share of the credits rated triple-C and below increased to approximately 12 percent during the first quarter, according to Fitch.

Copyright Reuters, 2011