Rebounding high-yield market braced for busy September

Fri Aug 22, 2014 8:26am EDT

* Strengthening European market could see primary rush

* Institutional investors still have cash to put to work

* Companies that held off in July ready to return

By Robert Smith

LONDON, Aug 22 (IFR) - Reports of the high-yield market's death have been greatly exaggerated, with professionals across the market bracing for a rush of new deals in Europe if conditions continue to recover.

The European high-yield market had an incredible run in the twelve months to June, seeing both record volumes in primary and consistently positive returns, but at the end of July the asset class was battered by outflows on both sides of the Atlantic.

The Barclays European HY index posted negative returns in July, the first negative month since June 2013 when the Federal Reserve's discussions of QE tapering rocked fixed income.

But while the European primary market is languishing in its customary August break, behind the scenes bankers are priming deals for September as the asset class shows tentative signs of recovery.

"The pipeline for September is looking quite healthy but a lot of issues are opportunistic and subject to market conditions," said Henrik Johnsson, head of EMEA high-yield and loan capital markets at Deutsche Bank.

"Although there is currently a lack of data-points on the primary side due to the August slowdown, the secondary market feels healthier and the US is already recovering."

The iTraxx Crossover index blew out past 300bp on August 8, its widest point since March, but has since tightened more than 50bp to less than 250bp.

Deals priced at the end of July are also catching a strong bid in the secondary market. Lindorff's LBO bonds, the last high-yield deal priced in Europe, are now bid at a cash price of 105 on the euro secured bonds and 104.5 on the unsecured. Pizza Express's LBO bonds are also bid above par on both tranches, bucking the trend of underperforming sterling deals.

FLOWS PUZZLE

With the market regaining its lost momentum, investors are also bracing themselves for a quick pace next month.

"We've heard that the docket for September is pretty full," said Jon Brager, a senior credit analyst at Hermes Fund Managers. "Once the fund flows stabilise and people get back to their desks I have a feeling you could see a barrage deals in the first week."

Fund flows are the one piece of puzzle missing in the European high-yield recovery so far. While US high-yield funds have now seen two consecutive weeks of inflows, European funds monitored by JP Morgan registered a hefty EUR664m outflow in the week ending August 13.

"The big outflow number you saw earlier this week seems to be a lagging indicator as we're not getting the sense that outflows are a theme on the buyside at the moment," said Johnsson, however.

Johnsson is not the only one sanguine about flows. One head of European high-yield bond syndicate pointed out that Europe is less sensitive to retail flows than the US, and that the big institutional funds are still very long cash.

"They need to put it to work somewhere, and we've already got to the point where some names are wide enough that it's made sense to buy again," he added.

AHEAD OF THE PACK

While market veterans are poised for a rebound, it would be difficult for the pace to match July's. The rate of supply was relentless, with 31 tranches in European currencies from 24 issuers, half of which were debuts in the European market.

The month would have been even busier without the bout of volatility at the end. Aside from two pulled deals from Winoa and EM&F, a number of companies pre-marketed bonds that they then held off from officially launching.

"There were a lot of companies hoping to come before the summer break so while it's hard to read too much into a few days, if things continue to be constructive we're going to see a pretty fast start to September," said the syndicate banker.

Bankers are understood to have pitched potential deals for a number of trickier credits to select investors, including previously restructured firms such as Greek telecoms group Wind Hellas and Belgian concrete maker Consolis.

These deals could surface publicly if the market strengthens in September, and a number of companies are already getting their documentation in order to try to get ahead of the pack.

"It's one of the busiest Augusts I can remember," said one senior high-yield bond lawyer.

"Deal time frames have also shortened. You might not hear from an issuer for months and then suddenly they want the documents to send off to the ratings agencies in a matter of days." (Reporting by Robert Smith, Editing by Helene Durand and Julian Baker)