Europe’s high-yield primary market set for repricing

Market faces bumpy Q1 characterised by negative total returns

LONDON: Potential bond issuers in Europe’s high-yield market may face higher coupon costs to get deals done after a jittery first quarter characterised by negative total returns, continued fund outflows and escalating trade tensions between the world’s top two economies.

“Investors have become more cautious on credit risk and therefore more selective, but appetite for high quality names is still there, just slightly more yield is needed,” said Simon Francis, co-head of leveraged finance EMEA at Citigroup Global Markets Ltd.

Corporate bond sales by high-yield issuers slowed by 32% in the first quarter compared with the same period last year. A total of 51 tranches priced, driving quarterly issuance to about 18.3bil-equivalent (US$22.4bil), Bloomberg data show. High-yield bond returns have declined to -0.67% for the first three months of this year, down from 6.26% for the whole of 2017.

The weaker backdrop has been particularly felt by those executing new issues in recent weeks. Some borrowers such as Corestate Capital Holding SA and Stark Group had to amend deal documentation to find clearing levels while Virgin Media Group sold receivables notes at the wide end of price talk.

“As for pricing of primary issuance from here, the repricing of weak single-B and triple-C risk will likely lead to a higher premium offered for taking higher levels of credit risk,” said Mitch Reznick, co-head of credit at Hermes Investment Management.

Some higher beta borrowers, namely those rated triple-C, are said to be lining up new deals for the coming weeks. But for now they are taking a “wait and see” approach amid market uncertainty, according to people familiar.

An issuer who has already taken that tack is travel service provider TUI AG, which after holding an investor call earlier in March for a minimum 400mil seven-year offering said it would wait for the right market conditions.

After a prolonged period of riskoff sentiment, the next triple-C rated borrower to seek financing will likely be a bellwether for the high-yield primary market. The last such deal to price in Europe was in January when Matalan Finance Plc sold £130mil of second lien secured notes, which are currently marked at 97.5, according to CBBT prices.

“We are likely to see the return of more cuspy names once the market settles down,” Hermes’ Reznick said, who added that the recent market weakness “has hit triple-C credit first and we’ve seen those higher beta names underperform.”

Jumbo merger and acquisition (M&A) deals are expected to provide another driver of issuance in Europe’s high-yield market in the second quarter. The pipeline of M&A-linked bond transactions currently includes:

> Flora Food Group to raise just under in notes

> Refresco Group NV taken out by bonds

> TDC A/S bridge to be taken out by bonds, revolving credit facility

> Akzo Nobel NV chemical backed by bonds, term loans

With high-yield returns turning negative, a more selective approach to buying new paper may be adopted from some fund managers in a bid to avoid swallowing major losses. — Bloomberg 445mil bridge to be unit 1bil buyout