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European high-yield bond market set to re-open, but leveraged loans may lag

As market participants return from the Easter break there are reasons to believe a re-opening of Europe’s leveraged finance segment is drawing closer, with the high-yield bond space likely to host new supply in the coming weeks, though loans are expected to lag.

Secondary markets have rallied — or at least stabilized — for the last two weeks, and accounts are willing to put money to work, albeit in strong, large, and defensive credits. Moreover the investment-grade primary is wide open and hosting record levels of issuance, while the first new issue with a sub-investment-grade rating since coronavirus shut down high-yield emerged last week.

Bankers, while reluctant to be precise on timings, emphasize demand for a new issue will not be the problem, but rather finding the right type of issuer willing to pay up is a more difficult prospect. “As for my pipeline, I agree there is demand, however we are struggling to find the correct issuer,” said one head of syndicate.

"I think you will start to see new high-yield deals emerge some point after Easter,” said another banker, speaking before the break. “It will be double-Bs that need liquidity and are willing to pay. Our conversations with accounts make clear that as long as you put a decent new-issue premium on an offering, they will buy it. I think a number of accounts are worried they have missed the rally, and so will bite your hand off for attractively priced paper.”

Moreover, as large crossover-style credits typically have plenty of debt to roll over and general financing needs — and given liquidity is crucial in this current environment — this hunt seems unlikely to be a fruitless one.

Cost of business
The key question then becomes how much that debt will cost. Again, bankers are reluctant to be too precise here, employing the old adage of “it depends on the credit,” though there are some indications to be gleaned from their feedback on pricing.

The first of these is new-issue premiums in the investment-grade space, and this week Syngenta AG gave a pricing point for a ‘five-B’ rated transaction (ie. a deal rated investment-grade by one agency, and high-yield by another). The BBB–/Ba2/BBB rated transaction saw books open with initial price thoughts (IPTs) of mid-swaps plus 400 bps area, and once the book built to €1.8 billion for an expected €500 million ticket, official guidance was released at MS+375 bps area, with the €500 million offering of six-year notes finally pricing at plus 365 bps.

The borrower has a well-stocked dollar curve, but far fewer outstanding euro bonds. The new notes slip between its 1.875% euro notes due November 2021 and 1.25% notes due September 2027, which closed prior to the new-issue announcement at par and 90.5 respectively, with z-spreads of mid-swaps plus 215 and 282 bps, according to data from Refinitiv.

Amid the barrage of new issues in IG the best credits, such as Fresenius Medical Care Reinsurance Co., have paid as little as a 30 bps new-issue premium, while ‘hairier’ names (those with a more storied credit history) can pay up to 150 bps of premium. This is on top of the fact their debt is likely trading with a higher spread than before the crisis hit, though a number of credits have now climbed back above par (though still below where they were before, such as the Altice International S.à r.l. 2027 notes or Netflix Inc. 2027).

Loans lag
It is a fairly similar picture in the European loan market, with accounts noting they are especially attracted to large-cap companies at the moment. That said, bankers expect the loan market to lag high-yield, and do not feel there is the same depth of demand for single-Bs.
“We could price a double-B loan as there would be support from commercial banks but an institutional term loan looks hard to do,” says a banker. “I would not be confident bringing a €500 million deal as CLOs aren’t really buying and managed accounts are still cautious.”

The rally in loan secondary markets, while still a little behind high-yield, is pushing names in mainly defensive sectors back to levels in the mid-to-high 90s. Techem Energy Metering Service GmbH & Co. KG, for example, is bid at about 95, up from a low point in the high-70s.

At least a tentative return of stability allows for the type of relative-value calculations needed for a return of issuance, while the speed of the secondary recovery leaves room for new issuance. Indeed, managers say there are inbound inquiries on what sort of price level could get them interested in a new deal.

As in the public market, issuance would most likely need to come from the higher-rated end of the spectrum, sources add. “A double-B rated deal in a defensive industry could reopen the market, but it would need to pay up,” said one manager. “It could always reprice in six months if things improved.”

But, for the moment, most loan accounts expect high-yield to take the lead in the return of primary activity given it is more suited to provide the type of bailout financing needed by companies not taking part in government-backed schemes.

This article was written by Luke Millar and David Cox. Luke is senior news desk manager at LCD, and David Cox is senior editor at LCD.

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