Onwards and upwards

Author: | Published: 1 Oct 2013
Email a friend

Please enter a maximum of 5 recipients. Use ; to separate more than one email address.

Deutsche Bank’s associate general counsel in London and European debt markets legal practitioner, Chronis Anoustis, explores the inexorable rise of the high-yield bond

Issuances of euro-denominated high-yield bonds have reached record levels this year.

There has been $82 billion of high-yield issuance in the euro market so far this year, up from $45 billion in the same period last year, according to the data provider, Dealogic. The regional market thereby now makes up 15.6% of the global market – the highest proportion since the peak of the 2006 credit boom.

The market also saw a rare decoupling from its US counterpart in July, as investors scrambled to increase their exposure to the EU region.

Deutsche Bank's Chronis Anoustis assesses the sustainability of such demand and explores how the global quest for yield is impacting European debt markets.

Do you expect the recent upsurge in activity to continue in the second half of 2013?

"The continuing process of bank de-leveraging should be positive for the evolution of European leveraged finance"

The new issues market has almost doubled so far this year, making 2013 the busiest year since 2006. The expectation is that the high-yield bond market will continue to be active into the final quarter of the year and beyond. The market and the investor base keeps growing and can be seen as having started to come of age. Increasing numbers of European corporates, whether financial sponsor-owned or otherwise, are expected to use high-yield as a regular source of funding going forward. The product is also increasingly used to fund acquisitions, with vendors now more familiar with the process and willing to assist in the preparatory work to enable the bonds to be issued quickly, including before the acquisition completes.

According to Barclays research published in September, 28% of activity year-to-date was from 54 debut issuers. During the whole of 2012 there were 19 debut issuers, which represented 18.4% of the market. What's driving debut issuers to the market?

High-yield is part of the wider fundamental market trend of companies in Europe switching from loans to bonds. The use of high-yield bonds is enabling companies to diversify their funding sources and extend their maturities and is proving increasingly attractive to European corporates who have to date relied solely on bank relationship lending.

Some issuers are also attracted by the greater flexibility high-yield affords them, when compared to the terms of traditional European bank lending. Financial sponsors have historically been more familiar with the product, but corporates are undoubtedly getting more and more familiar with it now. If a company in a given business sector or market enters the high-yield market, it can arouse the interest of other companies in the same sector and help give the product added momentum in those geographical markets and/or sectors.

How has this volume been affecting some of the bond terms?

The market has been seeing packages that reflect the position of the business, and if one looks at covenants as a package, there have been some interesting trends. Take the reduction in the length of call protection, where now seven-year packages typically have three-year protection rather than four. Some issuers have also been requiring portability and increased ability to take dividends once the business has reached a certain threshold. The high-yield market is ultimately a market like any other though, that can ebb and flow according to market conditions and credit-specific considerations.

To what extent are bond terms now appearing in revolving credit facilities?

Use of bond-style incurrence-based covenants is becoming increasingly common in these sorts of facilities. The revolving credit facility (RCF) is typically just a relatively small part of a larger transaction involving a larger number of high-yield bonds. This trend goes back to a 2004 high-yield bond deal where this was first pioneered, thereafter having a moderate run. Since 2009, however, there has been a huge increase in RCFs being used in conjunction with all bond deals and it has become much more widespread and actually rather mainstream as a capital structure.

How has EU sponsors' increasing use of US markets to fund EU acquisitions affected EU leveraged financing?

The European leveraged finance market has always been influenced by trends in the US leveraged finance market. This can be seen not only in the high-yield bond, which is itself a long-established US financing technique, but also in the fact that many European high-yield bond deals continue to attract sizeable interest from buy-side investors based in the US, alongside Europe-based investors. And now some European-based sponsors have been accessing the big and liquid US market for covenant-light term loans, which sometimes have high-yield bond-style incurrence-only covenants and are also placed with US institutional investors.

In May, Nomura predicted an issuer would come out with a pure European cov-lite loan without the support of a US tranche within the next 12 months. Is this is still likely?

There has been a kind of convergence of bond and term loans in the US as noted above (and note that buy-side investors there often participate in both types of deal), so this is giving rise to speculation that the European markets might also see something like this in the not-too-distant future. It is certainly possible if the stability of the loan markets continues, and this too may ultimately act to increase choice further for issuers and borrowers in terms of the different financing techniques and technologies available to them.

How do you expect Basel III implementation and the US quantative easing taper to affect the EU leveraged financing, high-yield and syndicated lending?

The continuing process of bank de-leveraging should at the end of the day be positive for the evolution of European leveraged finance, with institutional investors increasingly stepping in to provide new sources of capital and liquidity for corporates and financial sponsors, as they already do extensively in the US, whether via the bond or loan markets. Many market participants seem to continue to work on the assumption that any US taper would only begin to take effect in a meaningful way once the wider economy is in the right place so as to withstand higher funding costs.

About the author

Chronis Anoustis
Associate general counsel in London, Deutsche Bank
London, UK
E: chronis.anoustis@db.com
W: www.db.com

As associate general counsel in Deutsche Bank's London office, Chronis Anoustis heads the bank's inhouse debt team, covering high yield, leverage finance, syndicated lending as well as export, commodity and trade finance.

He joined Deutsche Bank in 2003 from Clifford Chance, where he was a banking associate, to help Deutsche Bank focus on its leveraged finance business.

Return to supplements