Softer tone could spoil high-yield's year-end party

Fri Nov 16, 2012 9:48am EST

* Year-end deal rush prepped just as markets turn

* Investors shy away from riskier deals to lock-in returns

* PIKs to remain a rare occurrence in Europe

By Natalie Harrison

LONDON, Nov 16 (IFR) - Leveraged finance bankers are pressing on with a flurry of deals intended to hit the European high-yield bond market after Thanksgiving, just as the U.S. market's first major wobble of the year is beginning to have a broader impact.

As many as eight deals from repeat and debut issuers are being lined up, with the bulk of them scheduled to hit in the two weeks beginning November 26.

"The market is softer, but Europe really hasn't been that busy in terms of supply, and issuers want to get in before things really quieten down in mid-December and stay that way into January," said one high-yield syndicate banker.

A big outflow of USD1.3bn from U.S. high-yield funds in the past week, according to Lipper data, has made bankers more nervous. And in an unusual turnaround, dollar tranches on recent cross-currency trades for companies like Virgin Media and Perstorp are underperforming.

By 1432GMT, the iTraxx Crossover was 5bp wider on Friday at 567bp, having seen a 30bp setback this week and underperformance versus the investment-grade index. Cash prices in Europe, so far however, have been broadly resilient.

"Yes, the outflow is a big number, but we've seen a long run of cash inflows and the Crossover is still at a healthy level. I would describe Europe as having a softer tone, but I doubt there will be much activity before Thanksgiving so we have time to assess the situation," said another high-yield syndicate official.

The bulk of the new deals being prepped are more of a Single B nature, rather than the safer Double B rated issues that investors tend to favour in more volatile market conditions, bankers said.

Among the potential deals is another Payment-In-Kind bond, following on the heels of Swedish cable company Com Hem's EUR250m PIK this week, and a bond that will form part of the financing for Carlyle's acquisition of Dupont.

Polish chemicals company Ciech, expected to be rated B2/B, will get in before the rush having mandated Credit Suisse and Barclays for a EUR225m senior secured bond that will begin roadshowing on Monday with pricing due mid to late week.

TRICKY TIME FOR AGGRESSIVE DEALS

More aggressive forms of financing such as PIKs, and more challenging refinancings for higher-leverage companies such as specialty chemicals company Perstorp, have not been easy to sell in the past couple of weeks, with the latter restructured after the unsecured tranche met a lukewarm reception.

"We didn't buy either, but would take Com Hem over Perstorp any day. We did consider Com Hem, but having made strong returns this year, and the market feeling the way it is now, it doesn't make sense to start buying this sort of paper," said one investor.

Although Com Hem has deleveraged since BC Partners bought the business last year, increased competition over the last couple of quarters means that the company will more likely flatline next year, the investor said.

"That did not sit comfortably with the partial dividend proceeds of the deal," he added.

Even the leads admitted that the timing of Com Hem's rare euro-denominated PIK was not ideal, albeit a bit unfortunate. The bond was announced on Monday, before U.S. markets deteriorated on fears centred around the fiscal cliff.

"It was never going to be an easy PIK to place because the company has not grown as quickly as many of its competitors," one banker said.

The EUR250m 2019 PIK, rated Caa2/CCC+, priced at a discount at 97.925 late on Thursday to yield 13%.

The book was split roughly 50:50 between European and U.S. investors, and the bond is likely to be very illiquid. One banker close to the transaction said it was a touch higher at 98, while others saw it slightly weaker.

PIKs are never an easy sell, even at the best of times, due to their deep subordination. For that reason, one banker said the deal was not a good read of the whole market.

European companies that have issued PIKs this year have mostly done so in dollars - Polish telecoms firm Polkomtel and Luxembourg-based Dematic - while the restructuring of Stork in the summer including a seven-year EUR240m Holdco PIK which refinanced an existing PIK and had a thin investor base.

The fact that this deal got done is good news for Com Hem's private equity owner BC Partners which had been holding the paper for a year at an attractive yield of 15-16%.

"In the U.S. we have seen a ton of PIK toggles, but we just haven't seen that aggression in Europe," said one leveraged finance banker.

"It's significant that we've seen a non-cash paying instrument get done, and I'm sure that banks will be sending our term sheets for other potential deals, but the market is feeling a bit weaker now."