Matalan, Pure Gym tread carefully in hesitant sterling market

LONDON, Jan 16 (IFR) - Matalan and Pure Gym are offering some of the highest levels on sterling paper over the last year, a sign that leads are marketing UK consumer paper more cautiously than in 2017.

Matalan's £330m 5NC2 first lien secured note, rated B2/B- is being whispered unofficially at high 6s/low 7s, while the £150m 6NC3 second lien secured note, rated Caa2/CCC, is being whispered in the high 9s/low 10s, according to two investors.

The outstanding £342m 6.875% 2019 first liens and £150m 8.875% 2020 second liens Matalan is seeking to refinance closed Friday yielding 9.50% and 9.80%, respectively, according to Tradeweb data.

Pure Gym, a debut issuer, has also had to put a juicy level on its offering, setting IPTs at high 6s for its £360m 7NC3 senior secured offering to back its buyout by Leonard Green & Partners (IOB: 0QOQ.IL - news) , rated B3/NR/B+.

The average coupon on sterling paper with a Single B rating from both Moody's and S&P has been 5% over the last year. The only example of Triple C supply came from Voyage Care, which paid a 10% coupon, though it was only a mere £35m in size.

"It's UK risk so it's going to divide opinion, so there needs to be some compensation," said one trader looking at Matalan.

"If they take things too tight there's no follow-on buying and these things tend to struggle, so they're going to have to be cognisant given what's going on in the UK High Street."

The cautious approach on the new deals marks a change from last year, when, most notably, budget supermarket Iceland had to drop a 10-year note after pushing tight on pricing and cut the overall size of its deal despite its success story relative to other British retailers.

"I think banks learned that they could get burned pretty badly," said one fund manager.

While investors acknowledge the uptick in Matalan's recent quarterly results, it is harder for the company to pitch on that performance compared to continental retailers such as Takko that have a similar story, as those tended to anchor their marketing on improved growth in Europe.

Both companies finish their roadshows on Wednesday.

Barclays (LSE: BARC.L - news) , Lloyds and Morgan Stanley (Xetra: 885836 - news) (B&D) are leading Matalan's deal, while Barclays (Swiss: BARC.SW - news) (B&D) and Jefferies are joint global coordinators on Pure Gym, with RBC, Credit Suisse (IOB: 0QP5.IL - news) and ING as joint bookrunners. (Reporting by Yoruk Bahceli, Editing by Helene Durand, Philip Wright)