U.K. High-Yield Issuance Undeterred by Brexit in Record Comeback

  • Sterling issuance soon to total 1.78 billion pounds for Jan.
  • Economic growth, narrowing credit spreads conducive to sales

A volatile pound and the prospect of Britain leaving the European Union are proving no match for the U.K.’s high-yield market. Sterling-denominated bond sales by companies rated below investment grade are off to a flyer in 2017, already making this month the busiest January for issuance on record, according to data compiled by Bloomberg.

Non-financial issuance so far this year totals 1.35 billion pounds ($1.66 billion) after Virgin Media Inc. on Wednesday priced 675 million pounds of senior secured notes that pay a coupon of 5 percent. Add to that Nemean Bondco Plc’s two-part sterling offering, with the roadshow due to conclude today, and the tally rises to 1.78 billion pounds, the highest ever for this month.

Better-than-expected economic growth in the post-referendum period and a narrowing of high-yield sterling spreads versus European levels are prompting issuance activity in the U.K., according to Stephen Baines, a fixed-income investment manager at Kames Capital in Edinburgh.

“There was a post-Brexit shock, with investors relying on the view that U.K. growth would slow sharply immediately, and this sent sterling high-yield spreads much wider,” Baines said in an interview. “The slowdown has been much less than expected, and since the pound premium is no longer so high, it makes sense for borrowers to return to the market.”

Many issuers stayed on the sidelines last year as high-yield sterling spreads jumped 132 basis points in the immediate aftermath of Britain’s decision to leave the EU. With transactions stalling in the months after the June vote, the total for last year stood at 4.15 billion pounds, marking the lowest annual volume since 2012. The four deals announced so far this year -- including offerings from TalkTalk Telecom Group Plc and Amigo Loans Ltd. -- represent nearly half of the yearly total for 2016.

Currency Swings

The pound’s recent volatility hasn’t proven to be a problem for high-yield investors so far, as most use hedges to protect against sudden moves in the currency, Kames Capital’s Baines said. Sterling has dropped more than 17 percent since the U.K. referendum.

Baines also noted that two of the companies issuing high-yield debt this year -- Virgin Media and Talktalk -- operate businesses largely unaffected by swings in foreign-exchange markets.

“We haven’t seen any new issuance from retailers or food producers; these are sectors that we expect to be operationally challenged by the pound weakness in 2017,” he said.

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