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Volatility and playing reform toughen the chances for 888 bond deal

Banks are braced for losses on a £1bn bond and mortgage deal backing on-line UK playing firm 888’s takeover of rival William Hill’s operations exterior the US, marking the newest debt sale to go awry in risky markets.

Funding banks have incurred steep losses on a string of current debt gross sales backing riskier company acquisitions because the offers unravel within the face of rising rates of interest and more and more cautious buyers.

In these offers, banks initially underwrite the debt after which promote it on to specialist funds, that means the underwriters can guide losses if buyers demand increased yields than initially anticipated.

JPMorgan and Morgan Stanley, the 2 banks main 888’s bond and mortgage deal, had been scheduled to wrap up the debt sale this week. However JPMorgan introduced on Friday that it might now be “delayed till mid subsequent week”.

The US funding financial institution cited a “delay” in finalising the documentation across the US greenback mortgage portion of the deal, together with the approaching July 4th vacation.

Nonetheless, bond and mortgage fund managers who had been approached to purchase the debt mentioned tepid demand had hit the sale, with buyers not even tempted by double-digit yields. The banks started advertising and marketing the deal at a yield of round 10 per cent, however will now have to cost it even increased.

JPMorgan and Morgan Stanley declined to remark.

888 is buying William Hill’s operations outside the US, which embrace 1,500 UK betting retailers and on-line operations in markets reminiscent of Italy and Spain, from on line casino operator Caesars.

Rising inflation and the prospect of upper rate of interest rises have sapped buyers’ urge for food for threat, with European high-yield bond indices dropping round 15 per cent this 12 months.

On prime of the stresses in debt markets, the UK authorities’s evaluate into the 2005 Playing Act, which is anticipated to clamp down on downside playing, can be weighing on 888’s debt deal.

“It’s unimaginable to take a view on this credit score earlier than the federal government white paper is out,” mentioned one mortgage fund supervisor.

The UK authorities coverage doc, due within days, will mark the largest shake-up of the trade in 17 years. Tradition secretary Nadine Dorries is ready to advocate a sequence of measures, together with a most stake of between £2 and £5 for on-line casinos, stricter checks on clients’ earnings ranges and a ban on free bets and VIP packages for downside gamblers.

However the sector stays unsure over the main points, significantly whether or not the federal government will go for harder curbs, reminiscent of a brand new levy on playing earnings to fund public well being initiatives. “There’ll be a good quantity of ache, we simply don’t know precisely the place it’s going to return,” mentioned one playing trade govt.

When banks battle to promote underwritten offers, they’ve to supply the debt to buyers at a reduction to face worth, leaving them with a loss. JPMorgan started advertising and marketing 888’s deal at round 92-93 cents on the greenback, however fund managers count on it to in the end shut at a fair steeper low cost.

The group of banks underwriting the deal — which additionally contains Mediobanca and Barclays — have already determined to carry round £760mn of 888’s debt on stability sheet, reasonably than attempting to promote it to buyers.

The playing deal is the newest leveraged buyout to trigger ache for funding banks, which underwrote debt packages earlier than a market downturn crimped demand for riskier debt.

A gaggle of banks led by Goldman Sachs positioned a £1bn bond backing the takeover of UK supermarket Morrisons at a steep low cost in Might. These banks are nonetheless sitting on billions of kilos in unsold loans backing the deal, which they’re anticipated to incur additional losses on.

European high-yield company bond issuance has dropped strongly this 12 months in these tough circumstances, with Refinitiv knowledge displaying proceeds down 77 per cent in comparison with the primary half of 2021, when many corporations rushed to lock in beneficial rates of interest in benign markets.

“It’s a type of that in a great market would get completed, however want to return with some concession,” mentioned one bond investor, whose crew handed on 888’s deal. “In a foul market, [it is] a lot more durable.”


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