LBO Fever to Drive European High Yield Supply Through Year End

  • Larger M&A financings such as Stada to bring fresh supply
  • ‘New money’ flow marks change from slew of refinancings YTD

The final four months of 2017 may have a different flavor for European high-yield investors as they contend with a significant amount of fresh supply, marking a change from the deluge of refinancings that have dominated sub-investment grade issuance so far this year.

The pipeline for the coming months includes bonds from large leveraged buyout deals such as Stada Arzneimittel AG and Europcar Groupe SA, which alone could bring almost 2 billion euros ($2.4 billion) of new money to the market, alongside smaller issues from Stonegate Pub Co. and Promontoria MCS. Some syndicate bankers estimate the volume of new issuance at near 10 billion euros in the next couple of months, with a significant part being driven by acquisition financing.

“We’re seeing a shift in our forward calendar towards more M&A-related activity,” said Mathew Cestar, co-head of credit products at Credit Suisse in London. While high-yield volumes are up substantially this year, “the lion’s share of the activity has been refinancings given rates and volatility have stayed lower than many people expected.”

The additional supply from acquisitions will boost the share of M&A financing in the total volume of new issuance to around 50 percent in the next few months, with the remaining being refinancing deals, Cestar said. So far this year, the split was two thirds of refinancings versus one third of new money transactions, according to the banker.

Europe’s high yield market has seen around 56.9 billion-equivalent of supply so far this year, a 66% jump over the same period last year and close to the 59.1 billion euro total for full-year 2016, according to data compiled by Bloomberg. The bulk of that occurred in June and July, with only Limacorporate SpA and split-rated CNH Industrial Finance Europe SA pricing a total of 925 million euros in August, a typically slow month for new bond issues.

With potential transactions such as Stada’s 825 million-euro bond sale and the taking out of Europcar’s 1.04 billion-euro bridge facility -- together with an expectation that the flow of refinancing will continue -- high yield volumes are set to very quickly surpass the whole of last year’s issuance. At least five new mandates were announced in the first two working days of September, including Kronos International Inc., Cortefiel SA, Equinix Inc., Garfunkelux Holdco and Iceland Bondco Plc.

Bigger Deals

The increase in buyout-driven activity is taking place partly because deals are getting larger in size and borrowers are looking for subordinated capital that includes bonds, Credit Suisse’s Cestar said. A growing interest in cyclical sectors such as industrials and metals and mining, which have a stronger track record in the bond market and therefore may find a more receptive investor base, also supports the dynamics.

Yet the loan market will remain the preferred route for most of European sponsors who look to finance their acquisitions with debt, according to leveraged finance bankers. Changes in loan structuring toward looser, bond-style documentation have made this product more attractive for issuers over the past few years, and this in turn is helping boost loan issuance volumes.

Waiting Mode

Fresh high yield supply will be seen as good news in a market that’s seen net new issues dwindle as companies redeem more than they sell and refinance bonds with loans.

“The high yield investor base has been waiting for this year’s heavy supply,” said Mansour Nehlawi, vice-president of European high yield and leveraged loans syndicate at Citigroup in London. “Cash levels have been building up, secondary volumes have been average and everybody is waiting for the primary pipeline to kick in so investors can put new money to work.”

While demand is expected to continue to overwhelm supply, a wider range of deals to choose from should give investors the chance to be more selective in how they deploy their cash, according to some investors and bankers.

“The market should digest the issuance but pressure to invest at this stage of the year could be lower,” said Colm D’Rosario, a London-based portfolio manager at Amundi Asset Management, which has 1.3 trillion euros of assets under management. “We may see investors less willing to give up on some of the basic structural or documentation issues where we’ve seen erosion in the past year or so.”

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