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14 | October 2010 | ifr special report HIGH-YIELD All grown up


The European high yield market is coming of age. A broader range of companies are looking to extend debt maturities and refinance loans with bonds, while a strained banking community continues to restrict its corporate lending activities. But can the market ever reach the same level of maturity as its US equivalent? Hardeep Dhillon reports.


market activity could set new records this year, with forecasts ranging from SG’s €35bn to Barclays Capital’s €40-€45bn. Issuance now derives from a wider range of industry sectors and geographies. DFS, Virgin Media, Manchester United Football Club, Ladbrokes, Matalan and Gala Coral have launched sterling transactions. Euro deals include US bottle firm Owens-Illinois, engineering group Durr and container shipping firm Hapag-Lloyd from Germany, investment firm Wendel and frozen food retailer Picard Surgelés from France and Hungarian oil and gas group MOL. “Liquidity both in euro and sterling market is much greater than even a year ago and many European issuers are now largely able to fund themselves in their functional currencies, even for significant


A €bn


14 12 10 8 6 4 2 0


99 Source: Barclays Capital 00 01 02 03 04 05 06 Total LBOs vs CLO volume and share


Largest LBO (Lhs) Arb CLO volume (Rhs)


€bn 07 08


09 H1 10


40 35 30 25 20 15 10 5 0


total of €32bn of high yield debt was issued in 2009. It is a remarkable feat for a market that only re-opened in July that year. Increasing primary


amounts, without tapping the US market,” said Arnaud Tresca, head of high yield capital markets at BNP Paribas. Issuer diversification is growing as more companies turn to the bond markets for the first time. New corporate borrowers include German car parts manufacturer Hella, Spanish environ- mental biotech company Abengoa, holiday company Thomas Cook and Dutch cable company Ziggo. Debut leveraged buyout refinancings have originated from chemical company Oxea, paper company Nordenia, Spanish helicopter services company Inaer and also Care UK in the sterling market. The increase in the number of corporates losing investment-grade status is also trans- forming the foundation of the market. Fallen angels now include household names across Europe, like Michelin and Lufthansa. Their funding requirements will boost volumes, potentially adding between €50bn and €150bn of supply.


Many have already tapped the high-yield markets including, Fiat, Pernod, Renault and Heidelberg Cement. Continental alone issued €3bn across three placements this year and is forecast to issue more debt in the first quarter of 2011 to help refinance around €8bn of syndicated bank loans maturing within the next two years. Credit Suisse estimates that European high-yield redemptions will gradually rise from €15bn this year and peaking at €23bn in 2014, though leveraged loan redemptions will spike from €6bn to €61bn in Europe, the Middle East and Africa. This could create a huge funding gap for Europe, with roughly €255bn needing to be refinanced between 2013 and 2016. “There is potential for the bond market to grow because not all of the huge lump of loan maturities will be able to refinance in the loan market,” said Parmeshwar Chadha, fund manager at Newton. “Hence, the European high yield market could possibly double in size in the next four to five years and grow to €300bn.”


Follow the leader


Despite the strong culture for close rela- tionship banking in Europe, the greater impetus toward bank disintermediation is transforming the market to be more in line with the US. “Banks have had to de-lever, reduce balance sheets and constrain loan lending since the credit crisis,” said Eugene Regis, high yield and leveraged finance credit strategist at Barclays Capital. “This is pushing more credits to the bond markets because companies can no longer depend on their traditional sources of financing.” Roughly 70% of new issues this year have been refinancings of existing debt. This trend will continue, as loans at LBO companies and fallen angels near maturity, he said. More LBO-type borrowers will look at refinancing in the high-yield bond market next year, he predicted. The return of a stronger LBO market is also possible,


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