IFR Magazine – June 08, 2019

Bond investors find Grubhub

debut appetising despite risks

Bulky order book allows for bigger size with a lower coupon

Investors worked up an appetite for
GRUBHUB’s debut bond on Thursday as the
FOODûDELIVERYûlRMûRATCHETEDûITSûPRICINGûONû
the deal despite concerns about
competitive pressures and poor covenant
protections.
And because investors were
clamouring for more, the company
INCREASEDûTHEûSIZEûOFûTHEûSERVINGûTOû
53MûFROMû53Mû2ATEDû"A"" û
the eight-year non-call three senior note
was priced at par with coupon of 5.50%, at
the tight end of guidance.
The deal was led by JP Morgan, which was
also a joint bookrunner with Bank of
America Merrill Lynch and Citigroup.
Strong technicals and a market
rebound last week on hopes of rate cuts
later this year overshadowed potential
cracks in the company’s credit quality
further down the road, said some buyside
accounts.
h0EOPLEûAREûLOOKINGûATûTHEûSIZZLEûANDûNOTû
paying attention to the steak,” said one
investor.
h,IKEûAûLOTûOFûTECHûCOMPANIES û'RUBHUBû
is a consumer of capital. The thing that is
different here is that they are not only
consuming capital, but margins are
DECLININGûASûWELL v
/RDERûBOOKSûWEREûOVERSUBSCRIBEDûBYûlVEû
times as leads accelerated pricing to
Thursday, a day ahead of schedule, a
second investor said.
A roaring stock market and low Treasury
yields supported a buoyant market overall
on Thursday. Even trade tensions were
REDUCED ûWITHûNEWSûTHATûTHEû7HITEû(OUSEû
was considering delaying tariffs on
-EXICANûGOODS
4HEûBOND û'RUBHUBSûlRST ûISûAûSIGNûOFû
maturity for the tech name as it builds out
its capital structure.
It went public through a hotly sought-
AFTERû)0/ûINû ûCAMEûWITHûAûSIMILARLYû
successful follow-on a few months later
and has more recently tapped the bank
market for funding.
0ROCEEDSûFROMûTHEûBONDûAREûGOINGû
TOWARDûRElNANCINGû53MûOFû
existing debt and to fund about US$60m
of cash for its balance sheet, according
TOû30
3INCEûTHEû)0/ ûTHEûSTOCKûHASûCLIMBEDû
FROMû53ûTOûHIGHûOFûAROUNDû53ûINû
November, only to tumble back to
US$63.37 on Thursday.

COMPETITIVE PRESSURES

Concerns about heightened competition in

the sector have come to the fore, and were

AûTOPICûOFûCONVERSATIONûAMONGûlXEDû

income analysts looking at the inaugural

trade.

“The business is here to stay and makes

SENSEûBUTû;'RUBHUB=ûHASûBEENûMAKINGû

heavy discounts to get market share, so the

question is whether it is sustainable in this

competitive environment,” said another

buyside account.

Analysts and investors have highlighted

EXECUTIONûRISKSûASû'RUBHUBûLOOKSûTOû

compete against the likes of UberEats,

$OOR$ASHûANDû0OSTMATES

“The big question for me is this industry

is rapidly evolving,” said the second

investor.

h'RUBHUBûWASûTHEûlRSTûBUTûTHEREûISûAûLOTû

OFûWELL

lNANCEDûCOMPETITIONûANDûAûLOTûOFû

CAPITALûISûmOWINGûINTOûTHISûSPACEûANDûTHEREû

will be some consolidation.”

-OODYSûNOTEDûINûAûRECENTûREPORTûTHATû

adjusted Ebitda margins have declined

SIGNIlCANTLYûOVERûTHEûLASTûFEWûYEARSû

BUTûUNDERSCOREDû'RUBHUBSûMODERATEû

lNANCIALûLEVERAGEûOFûTHREEûTIMESûANDûGOODû

liquidity.

h'RUBHUBûDOESûNOTûPAYûDIVIDENDSûANDûISû

not expected to make meaningful share

REPURCHASESû-OODYSûEXPECTSûPRIMARYûUSESû

of excess cash and debt capacity will be for

acquisitions,” the ratings agency said.

Nonetheless, some accounts have

wondered whether the bond should carry a

stricter covenant package to protect

against shifts in the sector.

In a report released last week, Covenant

Review pointed to a number of concerns

around the bond, including the lack of

restricted payment covenants and an

ability to incur more debt than is initially

apparent.

It also notes that customary merger

triggers are missing, so that a merger with

a widely held company would not trigger a

change of control.

h)TûISûAû$OUBLEû"ûNAMEûSOûTHEREû

isn’t much covenant protection at that

rating level,” said the second investor.

“It seems at some point that something

will shift and we don’t know what form

that will take. If you don’t have any

covenant protections with those changes,

it is a little scary.”

Paul Kilby

WEEK IN NUMBERS

24bp

„ THE EXTENT OF THE CURVE INVERSION

BETWEEN THREE-MONTH BILLS AND 10-

YEAR TREASURIES, THE BIGGEST SINCE 2007

20 years

„ A TENOR CHOSEN BY BOTH UNILEVER

AND JOHN DEERE LAST WEEK AS PART

OF THEIR EURO FUNDRAISINGS AS THE

OPPORTUNITY TO LOCK-IN THE RECENT

DECLINE IN LONG-TERM YIELDS WAS TOO

GOOD TO MISS

€8.5bn

„ THE ORDER BOOK FOR KFW’S €5bn JULY

2024 BOND LAST WEEK, WELL SHORT

OF THE RECORD €17.6bn IT GOT FOR ITS

PREVIOUS FIVE-YEAR OUTING IN JANUARY

ILLUSTRATING HOW SENTIMENT HAS

CHANGED SINCE THE BEGINNING OF THE

YEAR

-0.24%

„ THE YIELD THAT 10-YEAR BUNDS FELL

TO LAST WEEK, A RECORD LOW, AS FEARS

GROW ABOUT THE OUTLOOK FOR THE

GLOBAL ECONOMY

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

02/01/0702/01/0802/01/0902/01/1002/01/1102/01/1202/01/1302/01/1402/01/1502/01/1602/01/1702/01/1802/01/19

%

-0.3

-0.2

-0.1

0.0

0.1

0.2

0.3

03/01/1903/02/1903/03/1903/04/1903/05/1903/06/19

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