Volatility and gambling reform bolster odds of 888 bond deal
Banks are braced for losses on a £1billion bond and loan deal backing British online gaming company 888’s takeover of rival William Hill’s operations outside the US, marking the latest debt sale gone wrong in volatile markets.
Investment banks have suffered steep losses on a string of recent debt sales backing riskier corporate acquisitions as deals unravel amid rising interest rates and increasingly wary investors .
In these deals, banks initially underwrite the debt and then sell it back to specialist funds, meaning that underwriters can book losses if investors demand higher returns than originally expected.
JPMorgan and Morgan Stanley, the two banks leading the 888 bond and loan deal, were expected to complete the debt sale this week. But JPMorgan announced on Friday that it would now be “delayed until the middle of next week.”
The U.S. investment bank cited a “delay” in finalizing documentation for the U.S. dollar loan portion of the deal, as well as the impending July 4 vacation.
However, bond and loan fund managers who were approached to buy the debt said tepid demand had touched the selloff, with investors not even tempted by double-digit returns. Banks have started marketing the deal at a yield of around 10%, but will now have to price it at an even higher price.
JPMorgan and Morgan Stanley declined to comment.
888 buys William Hill’s operations outside the US, which include 1,500 UK betting shops and online operations in markets including Italy and Spain, from casino operator Caesars .
Rising inflation and the prospect of bigger interest rate hikes have undermined investors’ appetite for risk, with European high yield bond indices falling around 15% this year.
In addition to tensions in debt markets, the UK government’s review of the 2005 Gambling Act, which is expected to crack down on problem gambling, is also weighing on the 888 debt deal.
“It is impossible to comment on this credit before the publication of the government’s white paper,” said a loan fund manager.
The UK government’s policy paper, expected within days, will mark the industry’s biggest shake-up in 17 years. Culture Secretary Nadine Dorries is set to recommend a range of measures, including a maximum bet of between £2 and £5 for online casinos, tighter controls on customer income levels and a ban on free bets and free bets. VIP packages for problem gamblers.
But the industry remains uncertain about the details, particularly whether the government will opt for tougher restrictions, such as a new tax on gambling profits to fund public health initiatives. “There will be a lot of pain, we just don’t know exactly where it’s going to come from,” a gaming industry executive said.
When banks struggle to sell underwritten contracts, they have to offer the debt to investors at a discount to face value, leaving them with a loss. JPMorgan began trading the 888 deal at around 92-93 cents on the dollar, but fund managers expect it to eventually close at an even deeper discount.
The group of banks underwriting the deal – which also includes Mediobanca and Barclays – have already decided to hold around £760 million of 888’s debt on the balance sheet, rather than try to sell it to investors.
The gambling deal is the latest leveraged buyout to cause difficulties for investment banks, which took out loans before a market downturn reduced demand for riskier debt.
A group of banks led by Goldman Sachs placed a £1bn bond backing the takeover of British supermarket Morrisons at a steep discount in May. These banks are still sitting on billions of pounds of unsold loans backing the deal, on which they are set to suffer further losses.
High-yield European corporate bond issuance has fallen sharply this year amid the tough conditions, with Refinitiv data showing proceeds down 77% from the first half of 2021, when many companies rushed to block favorable interest rates in favorable markets.
“It’s one of those that in a good market would be done, but has to come with a concession,” said one bond investor, whose team passed on the 888 deal. bad market, [it is] harder.”