* Active Q1 predicted for primary after strong year-end
* Lending restraints, CLO demise to drive high-yield growth
* LBO prospects still uncertain
By Natalie Harrison
LONDON, Dec 14 (IFR) - European high-yield bond markets are
heading into 2013 in tip-top shape with bankers predicting an
active first-quarter as issuers take advantage of tight spreads
and deep liquidity to refinance maturing leveraged loans.
Strong investor reception to almost USD10bn supply in the
fourth-quarter, including deals from debut borrowers such as
TMF, Ciech and Rottapharm, has boosted the market's confidence.
"The trends of bank deleveraging and lack of new replacement
CLO issuance will again dominate the agenda in 2013. High yield
bond markets will therefore continue to increase their
importance as an alternative funding source," said Kristian
Orssten, head of high-yield and loan capital markets, EMEA at JP
As collateralised loan obligations (CLOs) - a large source
of credit during the 2006 and 2007 leveraged buyout boom years -
near the end of their reinvestment periods in 2014 and
regulatory pressure restricts banks' ability to lend, the
high-yield market should continue to expand.
Low economic growth, together with expected sub-3% default
rates also bodes well for the asset class.
"Of all capital markets, the growth prospects of high-yield
means it is the one market that we feel most optimistic about,"
European high-yield corporate supply across all currencies
totalled USD56.7bn during the year, compared to USD55.1bn in
2011 and USD63.2bn in 2010, according to Thomson Reuters data.
Although the European record set in 2010 remains, volumes
were still impressive given a shaky start in January which
prompted many European borrowers including Taminco, Polkomtel
and Fresenius Medical Care to turn to the resilient U.S. bond
market to fund leveraged buyouts and to refinance loans.
In terms of euro-denominated supply, issuers sold
USD31.2bn-worth of bonds versus USD28.3bn in 2011 and USD42bn in
European high-yield returns topped 20% in Europe in 2012 -
far outstripping the near 14% returns in the United States. As
underlying yields look set to stay low into 2013, investors will
likely be tempted to move further down the credit curve or buy
The breadth of supply over the past couple of months already
offers evidence of that. Well-known repeat issuers such as
Unitymedia have taken advantage of strong demand to print rare
10-year bonds, while Triple-C rated Payment-In-Kind bonds for
Com Hem and Annington Homes prove the market is wide open.
"The market conditions over the past three weeks have been
outstanding," said Henrik Johnsson, head of European high-yield
capital markets at Deutsche Bank.
"I would expect spreads to continue to grind tighter in
Europe if the U.S. fiscal cliff is resolved, and despite the
political situation in Italy."
Among other risks is a sharp slowdown in Chinese growth, but
absent a major shock, capital markets should remain open for
Another expectation is that Europe will play catch-up with
the U.S. in terms of spread performance.
There is still plenty of value in the European asset class
to compensate for default risk, bankers say, even though the
Crossover has tightened to 460bp from more than 750bp in May.
The average spread of high-yield over government bonds is
currently at 583bp, according to Bank of America Merrill Lynch
data, versus tights of just 241bp in the last cycle.
The spread differential between Double B and Single B
credits, meanwhile, is around 257bp.
UNCERTAIN PE EXITS
Leveraged finance bankers are in overall agreement that the
bulk of high-yield supply will be dominated by refinancings.
About 75% of bonds in 2012 were refinancing related, according
to Credit Suisse.
The main supply uncertainty, however, appears to be around
new LBO prospects following a dismal year in 2012 as many
auctions failed on the back of breakdowns in price negotiations.
However, some bankers are becoming more upbeat that
high-yield bonds will play a significant part in buyouts with
auctions for book publisher Springer and French caterer Elior
amongst the highest profile deals in the running.
"Potential capital commitments are probably at the highest
they have been in the second half of this year," said Johnsson.
As an alternative, however, financial sponsors that have
been unable to exit their investments will increasingly look at
dividend recapitalisations as well as more flexible bond
structures like floating rate notes.
Mathew Cestar, head of leveraged finance in EMEA at Credit
Suisse, predicted that dividend recapitalisations will become
more prevalent in 2013, up from 9% of all supply across
leveraged loans and high-yield bonds this year compared to 25%
in the U.S. leveraged finance markets.
"Investors' perceptions about recaps are changing. They
recognise that there are few IPO opportunities and only
selective M&A exits," said Cestar.
"These deals are also different to the last cycle in 2006
and 2007, when recaps were used to take leverage up to very high
Elizabeth Moore, head of acquisition and leveraged finance
capital markets at Nomura, agreed that investors were
increasingly open to dividend recapitalisations, pointing to
deals from the likes of RAC where private owner Carlyle had only
taken out about half of its equity investment from the proceeds.
There is also a focus on portability features, which allow
bonds to remain in place even when a business is sold, and
therefore would help pave the way for an exit further ahead when
M&A conditions become more favourable, she said.
"Portability features are not common, but there have been a
few transactions that have included them and every bank is
considering them now for selective transactions."
(Reporting by Natalie Harrison, IFR Markets; Editing by Alex
Chambers and Julian Baker)