Volatility and gambling reform toughen the odds for 888 bond deal

Banks are braced for losses on a £1bn bond and loan deal backing online UK gambling company 888’s takeover of rival William Hill’s operations outside the US, marking the latest debt sale to go awry in volatile markets.

Investment banks have incurred steep losses on a string of recent debt sales backing riskier corporate acquisitions as the deals unravel in the face of rising interest rates and increasingly wary investors.

In these deals, banks initially underwrite the debt and then sell it on to specialist funds, meaning the underwriters can book losses if investors demand higher yields than initially expected.

JPMorgan and Morgan Stanley, the two banks leading 888’s bond and loan deal, were scheduled to wrap up the debt sale this week. But JPMorgan announced on Friday that it would now be “delayed until mid next week”.

The US investment bank cited a “delay” in finalising the documentation around the US dollar loan portion of the deal, along with the impending July 4th holiday.

However, bond and loan fund managers who were approached to buy the debt said tepid demand had hit the sale, with investors not even tempted by double-digit yields. The banks began marketing the deal at a yield of around 10 per cent, but will now have to price it even higher.

JPMorgan and Morgan Stanley declined to comment.

888 is buying William Hill’s operations outside the US, which include 1,500 UK betting shops and online operations in markets such as Italy and Spain, from casino operator Caesars.

Rising inflation and the prospect of higher interest rate rises have sapped investors’ appetite for risk, with European high-yield bond indices dropping around 15 per cent this year.

On top of the stresses in debt markets, the UK government’s review into the 2005 Gambling Act, which is expected to clamp down on problem gambling, is also weighing on 888’s debt deal.

“It’s impossible to take a view on this credit before the government white paper is out,” said one loan fund manager.

The UK government policy document, due within days, will mark the biggest shake-up of the industry in 17 years. Culture secretary Nadine Dorries is set to recommend a series of measures, including a maximum stake of between £2 and £5 for online casinos, stricter checks on customers’ income levels and a ban on free bets and VIP packages for problem gamblers.

But the sector remains uncertain over the details, particularly whether the government will opt for tougher curbs, such as a new levy on gambling profits to fund public health initiatives. “There’ll be a fair amount of pain, we just don’t know exactly where it’s going to come,” said one gambling industry executive.

When banks struggle to sell underwritten deals, they have to offer the debt to investors at a discount to face value, leaving them with a loss. JPMorgan began marketing 888’s deal at around 92-93 cents on the dollar, but fund managers expect it to ultimately close at an even steeper discount.

The group of banks underwriting the deal — which also includes Mediobanca and Barclays — have already decided to hold around £760mn of 888’s debt on balance sheet, rather than trying to sell it to investors.

The gambling deal is the latest leveraged buyout to cause pain for investment banks, which underwrote debt packages before a market downturn crimped demand for riskier debt.

A group of banks led by Goldman Sachs placed a £1bn bond backing the takeover of UK supermarket Morrisons at a steep discount in May. These banks are still sitting on billions of pounds in unsold loans backing the deal, which they are expected to incur further losses on.

European high-yield corporate bond issuance has dropped strongly this year in these tricky conditions, with Refinitiv data showing proceeds down 77 per cent compared to the first half of 2021, when many companies rushed to lock in favourable interest rates in benign markets.

“It’s one of those that in a good market would get done, but need to come with some concession,” said one bond investor, whose team passed on 888’s deal. “In a bad market, [it is] much harder.”