Reuters: Private Equity: High-yield market hits bump in the road

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High-yield market hits bump in the road May 10th 2012, 14:57 By Natalie Harrison Thu May 10, 2012 10:57am EDT LONDON, May 10 (IFR) - Whether the blame lies with nervous investors, poorly managed deals or simply bad timing, Europe's high-yield market has suffered a significant setback that risks locking out all but the top-tier issuers in the next few weeks, experts say. A pulled bond deal from German roofing materials supplier Monier, and other deals from Europcar and Schmolz & Bickenbach that have struggled to win over investors, have raised fears of a leap backwards after an unexpectedly strong start to the year. "There is definitely an underlying concern. Effectively the market in Europe has infinite demand for BB and high-quality Single B credits, but not much for what we call traditional high-yield, with more subordinated capital structures," said one high-yield syndicate banker. "The majority of investors just don't have the mindset for that right now. They are being driven by fear." Some bankers laid part of the blame for the recent difficulties on the lead managers, saying that Monier should have been marketed more heavily in the U.S., while existing FRN investors in Europcar should have been leant on more heavily to roll over into the new issue. Either way, both deals were seen in isolation to a certain extent, and high-yield is still expected to play a vital role in leveraged buyout deals in the pipeline for companies like BSN Medical and Bird's Eye Iglo. That means, for now at least, the market is still poised for a bunch of supply later this quarter. "This doesn't stop us from underwriting deals or stop the auctions going ahead, and it certainly doesn't mean we've taken our foot off the high-yield accelerator in favour of loans in terms of acquisition financing," said one high-yield banker. "It just means it's a bit more finely balanced going to either market." BAD TIMING The sell-side also did itself no favours with the timing of the recent problematic deals. Bankers picked one of the most volatile periods since the start of the year to swamp the market with five deals, rushing issuers out before full-year earnings went stale. Monier, for example, pulled its bond on Wednesday as yields on Spanish 10-year bonds jumped above 6%. Not only were many buy-side managers taking advantage of the May Day holiday, but elections in France and Greece had already brought a widespread pullback across all asset classes. The cyclical nature of the deals also sparked criticism from investors, who can afford to sit back after enjoying returns of over 12% since the start of the year, according to Bank of America Merrill Lynch data. "When primary deals are pulled, there is a tendency for the sell side to blame the European high-yield fund community for being overly skittish," said Peter Aspbury, head of European credit research at JP Morgan Asset Management. "It's easy to forget that a lot of fund managers are subject to retail investor flows that can be highly reactive to equity market sell-offs. If your fund has to provide its investors with daily liquidity while the secondary high-yield market is illiquid, you are that much more inclined to preserve your cash than to buy new deals," Aspbury said. BACK TO THE U.S. Some bankers accused the buy-side of holding Europcar in particular to ransom. They also warned that some issuers may turn to other alternative sources of financing such as mezzanine loans, although this remains a very niche market. Europcar's owner Eurazeo had little choice in pricing its downsized deal to yield 14% despite a EUR110m cash injection, but Monier had greater flexibility. Monier's amend-and-extend agreement on its largest-term loan with its banks hinges on whether it can raise a EUR250m high-yield bond by the end of the year. But even if it doesn't return to the bond market, that debt does not mature until 2015. In the short term, European issuers may lean more heavily on the dollar market. Companies such as Ineos, for example, bypassed the European bond market last month after achieving cheaper refinancing costs across the pond. A USD853m-equivalent bond from B1/B+ rated UK travel operator Carlson Wagonlit this week also demonstrated the benefits of a dual-tranche USD/EUR issue. "It definitely helps to create a better dynamic," said one of the bankers. "If European investors see that the deal is getting support in the U.S., it helps give more conviction. With a sole euro deal, you don't get that interplay." Meanwhile, the fact that Monier's book was covered was seen as a positive by some players. "In the U.S. there seems to be a price for everything, but that's not been the case in Europe. But it looks as if the market was there for Monier, which I would read as a positive," said Jacques McChesney, a high-yield partner at Shearman & Sterling. "If a company wants to walk away from 10.5% term money, that's someone making a call on the cost of capital, and something that I find great solace from," McChesney said. "Issuers are having to adjust, but they are only slowly weaning themselves off cheap bank debt." (Reporting by Natalie Harrison, IFR Markets, editing by Alex Chambers and Marc Carnegie) Link this Share this Digg this Email Reprints

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