March 14, 2013 / 1:20 PM / in 5 years

LM comes into vogue for high-yield issuers

* Issuers pay premium for certainty of finance

* Sponsors style LM with flexible structures to aid exit

* Bankers entice investors with allocation bonus

By Natalie Harrison

LONDON, March 14 (IFR) - Liability management is the current flavour of the month in the European high-yield market, offering increasingly nervous issuers - who fear they are running out of time to refinance expensive debt - an additional strategy to capture current record low yields.

Although the volatility that followed the inconclusive Italian elections was only brief, it served as a sharp reminder of just how fickle capital markets can be.

High-yield companies have less flexibility to over fund and sit on surplus cash like their investment-grade counterparts, and any new issue, therefore, has to be matched by debt reduction.

As a result, liability management makes perfect sense.

“For any company that doesn’t feel it has unfettered access to the market, it makes sense to issue bonds now,” said Stephanie Sfakianos, head of debt restructuring at BNP Paribas.

“High-yield issuers are far more conservative in their refinancing strategies, and that’s where liability management can help.”

Companies are increasingly convinced that financing costs and conditions for sub-investment grade debt may deteriorate, and are keen to make the most of the current strong demand.

Barclays credit strategists expect overall high-yield volumes to reach EUR50-60bn this year, and of that around EUR5-10bn could be used to fund calls or tenders.

A growing list of companies have chosen this path with some EUR4bn of bonds already redeemed, including those issued by German cable company Unitymedia, UK furniture retailer DFS, and French healthcare software company Cegedim.


UK food producer Bakkavor is one of the issuers tipped to come next. In the aftermath of the 2008 financial crisis it joined the hoards of companies that tapped capital markets for the first time.

Many of those bonds, which now look very expensive, will become callable for the first time this year, giving issuers a chance to refinance at less punitive rates.

The average spread of high-yield over government bonds has halved to just 511bp from more than 1,000 in June 2011, according to Bank of America Merrill Lynch data, and companies are very aware of how attractive those borrowing costs are.

They also realise how quickly the opportunity to lock in low rates could slip through their fingers.

Cegedim, for example, is refinancing at substantially lower yields than would have been possible back in October when its bonds were bid at just 94 cents versus around 107 now.


Exceptional investor demand also means more aggressive structures are possible, such as dividend recapitalisations.

DFS for example recently offered to buy back its 2017 bonds issued in the summer of 2010 at 110.5. Had it waited for the summer, it would only have needed to pay around 107.3.

That begs the question why the company’s private equity owner Advent didn’t simply wait.

Banking sources close to the transaction said that the issuer did not want to take the risk that market conditions might worsen. Although it paid an expensive redemption premium, Advent was able to use the proceeds to pay itself a dividend.

Such deals only work in hot market conditions.

The bond’s portability is also considered punchy, but is a boon for Advent who will potentially be able to leave the debt structure in place if it sells the business.

Not only has the sponsor achieved a partial exit via the dividend recap, but a full exit should be more straightforward if the M&A and IPO markets do improve.

Rivals may look back on that deal in six months and ask why they didn’t do the same.


As in any sellers’ market, some gentle arm-twisting is being exercised. Banks are advising corporate clients to tender bonds at roughly the same level as their call price, even if they are trading significantly lower.

However in order to get a slightly better deal, banks are offering a sweetener to investors by promising them preferential allocations on the new bond.

“Issuers are riding the wave,” said Apostolos Gkoutzinis, a partner in the European corporate group at Shearman & Sterling, who advised UK furniture retailer DFS.

“They don’t expect the strong high-yield market to last forever, so they are making the most of it.”

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