Peripheral junk supply tipped to swell as risk appetite grows

Fri Aug 2, 2013 8:45am EDT

* Italian and Greek issuers dominate supply

* Pace could quicken as debut issuers await ratings

* Market wide open as even risky dividend deals fly

By Robert Smith

LONDON, Aug 2 (IFR) - Junk rated bond issuance from peripheral European companies has soared in recent weeks and bankers are battling for the next wave of mandates as investors get increasingly comfortable at pricing risk for these credits.

One banker said he knew of more than two dozen Spanish and Italian companies in the process of getting first time credit ratings in the Double B range, signalling that the pace of supply could quicken in the coming months just weeks after volatility slammed the door shut for peripheral issuers.

In the past two weeks alone, EUR1.6bn of peripheral issuance has printed, dominated by Greek and Italian debut issuers in the Single B ratings category, accounting for around half of total supply during this period.

"It's not surprising that we've seen all these peripheral issuers, and it will become even more pronounced going forward," said Tanneguy de Carné, global head of high yield capital markets at Societe Generale.

Italian gaming company Snai, for example, is aiming to tap the market, according to sources.

In Italy and Spain, local banks are still retrenching and many international banks have exited the market altogether, de Carné said.

"The pendulum has swung very much in favour of non-bank liquidity in these countries, so they will continue to prove attractive hunting grounds for capital markets mandates."

Even deals with controversial features such as portability and dividend recapitalisations have crossed the line, as investors feel adequately compensated for the additional risk.

"While there are some weaker deals getting done because the market technicals of the last few weeks have been good, these have not been coming at unfair prices," says Fraser Lundie, co-head of credit at Hermes Fund Managers.

The two Greek companies that have tapped the market this week, S&B Industrial Minerals and Intralot, offered investors 9.25% and 10% yields respectively.

One investor put fair value on S&B at 8.5%, and the healthy premium translated into strong secondary performance with the bonds trading up more than three points in just two days.

S&B's EUR275m deal had a EUR70m dividend element. Italian gaming firm Cogetech is trying to sell a smaller deal with a larger dividend, with guidance at a 10 to 10.25% yield.

CONGESTION

The frenetic pace of issuance suggests that bankers have been sitting on a backlog of mandates.

"Peripheral deals are always the first ones to be pushed back when it's a tougher market," said a syndicate banker. "Now that the market is back, there's a natural congestion of deals stacking up behind one another."

Intralot, for example, originally tried to price its deal in June, but had to pull it after spreads ballooned wider on QE tapering fears.

This taste of volatility may have provided an added incentive for peripheral borrowers to get deals away while they can, with the Crossover index tightening by more than 125bp between the last week of June and the start of August.

"Peripheral yields have enjoyed a good ride since last summer, but the spike they experienced in June might have convinced some issuers and their bankers that it's too risky not to approach the bond market now," said Peter Aspbury, a high yield portfolio manager at JP Morgan Asset Management.

MISPRICED

For seasoned high yield investors, the range of deals on offer should provide scope for careful credit selection, particularly when recent issues stabilise in secondary.

Some investors say the market is even mispricing deals, particularly where firms have limited domestic exposure.

"The Spanish auto parts firm Gestamp has very little domestic exposure, so for it be trading as wide as it is compared to American Axle & Manufacturing Inc in the US, for example, is not really warranted," said Lundie.

Not only is Gestamp larger and more diversified, but it also has a higher rating than Axle, at B1/BB versus B2/B. And yet, Gestamp's euro 2020s trade at a 450bp z-spread compared to Axle's dollar 2021s at 315bp.

Others say peripheral issuers may also be benefiting from the sell-off in emerging markets.

European high yield funds have seen three consecutive weeks of inflows, according to JP Morgan data, while EM funds continue to see outflows. EM-dedicated bond funds recorded USD714m of outflows in the week ending July 31, according to UniCredit.

"If there has been a reappraisal of the relative value of peripheral European versus emerging market debt, it ought to be beneficial for any such issuers looking to come to the European high yield market," says Aspbury.

"While peripheral credits did not become especially cheap during the May and June sell off, some investors might now be more comfortable seeking yield in European peripheral credits than in EM corporates." (Reporting by Robert Smith)

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