I was chatting the other day with a debt capital markets banker and an institutional investor. Both senior practitioners from major firms, they were bemoaning the fact that the international credit market had taken on a pretty vexing tone. It’s volatile, sentiment is nervy, primary issuance is sporadic as windows snap shut, liquidity is thin, and deal economics are uncertain as core yields head higher.
When the European high-yield (HY) bond market came up in conversation, though, the banker and investor grimaced and rolled their eyes in synch. No prizes for guessing why: on a global basis, primary HY bond activity has cratered. First-quarter issuance fell 72% year-over-year, according to Refinitiv, the slowest Q1 since 2016. And things haven’t improved much since then.
The euro and sterling HY bond markets have seen less than US$13 billion-equivalent all year, according to Bond Radar, from just 19 issuers. In fact, only four European HY names have got deals away in euro/sterling in the past 90 days or so. Under normal market circumstances, gaping issuance gaps are met by rampant demand from starved investors. Not today.
The rising rate environment is hardly conducive but European HY bond funds have suffered outflows and the secondary market has fallen several points: HY credit spreads are off by 200bp to 250bp since the start of the year. For an extra bit of idiosyncratic uncertainty, there is swirling chatter about corporate governance failings at German residential landlord, property developer and frequent HY bond issuer Adler. The group’s bonds have been hammered, forcing weakness in the European HY real estate segment, upsetting the tone of the broad HY market even more.
Seeking alternatives
European leveraged loans and HY bonds offered issuers reasonably similar economics at the beginning of the year but HY bonds are now out of kilter. Unsecured fixed-rate HY bonds have lost their lustre relative to secured floating-rate loans; the latter supported by a reasonable collateralized loan obligation bid. So, where they can, corporates are giving the European HY bond market a wide berth, preferring to wait, or to try the leveraged loan market, or the direct lending and private debt markets.
Mind you, it’s not exactly plain sailing in the leveraged loan market. Some of the jumbo leveraged buyouts (LBOs) and acquisitions underwritten prior to the latest market volatility will need careful planning – and timing – to ensure that financings are taken out in good shape. The spotlight here is particularly on Clayton, Dubilier & Rice’s £6.6 billion (US$8.09 billion) LBO of UK supermarket group Morrisons; 888 Holdings’ acquisition of the non-US business of online bookmaker William Hill (£2.1 billion financing); CVC Capital Partners’ €4.5 billion (US$4.68 billion) buyout of Ekaterra, Unilever’s tea business; and US corporate, legal and tax services specialist CSC’s acquisition of Dutch rival Intertrust (US$3.58 billion-equivalent financing).
Where they can, arrangers on some of those deals have been trying to reduce market exposure by squeezing out financings to alternative pockets of demand, even at the risk of booking losses.
Bond casualties
The primary European HY bond market has suffered casualties. French car rental group Europcar pulled its up-to-€200 million senior secured sustainability-linked note a week or so ago because of adverse market moves that had seen investors demand additional compensation commensurate with secondary market levels.
Refresco, the Netherlands-based bottler, had intended to tap the bond market to refinance its €445 million HY bond, which hit its call date on May 15. But the company ditched the bond market and wrapped the bond refinancing into the loan package backing its majority buyout by KKR. The €3.4 billion-equivalent euro, US dollar and sterling leveraged loan facility got away fine.
French auto parts manufacturer Faurecia said it is delaying the refinancing of what remains of its €4.2 billion bridge-to-bond backing its acquisition of German rival Hella. The company took out some of that exposure at the back end of 2021 via a €1 billion sustainability-linked bond and a €700 million environmental, social and governance (ESG)-linked Schuldschein (German private placement) and will wait for better times.
Pricing concessions
Issuers that have braved the HY bond market have been forced to pay up and, in some cases, tighten covenant packages to give investors better protection.
Leads on the €850 million two-part bond backing CVC Capital’s €2 billion minority buyout of La Liga, the Spanish football league, had to tread cautiously on May 13th thanks to a combination of market and idiosyncratic factors. Initial price talk of 7% area on the fixed-rate tranche widened and fixed at 7-1/8%. The Euribor plus 500bp floating rate note (FRN) priced with an original issue discount (OID) of 97.
Italy’s Biofarma, subject to a buyout by Ardian, got its €345 million senior secured FRN away, but leads were forced to price with an OID of 96 on a note offering a 575bp pick-up over Euribor.
UK housebuilder Miller Homes, an Apollo-backed secondary buyout from Bridgepoint, got its US$975 million-equivalent dual-tranche euro and sterling fixed- and floating-rate trade away at the end of April but it was no slam dunk. Initial mid-to-high 7% price thoughts on the fixed-rate sterling tranche gave way 8.25% pricing. (Miller had its hand somewhat forced by Morrisons, whose £1.075 billion private placement of senior secured notes the day before it tapped the market priced at a yield of around 8.25%, reducing the housebuilder’s room for manoeuvre.)
Non-investment-grade debt typically suffers more than core investment-grade in unsettled conditions; that’s just the nature of high-beta market segments. In the grand scheme of things, HY repricing shouldn’t be that much of a shock.
The fact that so many companies took advantage of very conducive debt market conditions in 2021 to load up was fortunate. The immediate outlook in Europe is not exactly bright and I get the impression market practitioners are not holding their breath ahead of any rapid snap back in HY bond sentiment. For now, it’s definitely a buyers’ market.
