Stirrings in the European high yield primary market

We’ve talked about new issuance a few times recently on this blog (see Matthew’s blog from December here and my more recent comment about the record issuance in Q1 here). But the focus has been firmly on issuance in the investment grade market, until now.

The European public high yield primary market was essentially closed for 18 months, with no new issues at all from August 2007 until January this year. This is perhaps not surprising since a lack of risk appetite, combined with forced selling led to a huge blowout in high yield spreads, with the spread on the Merrill Lynch Euro High Yield Constrained Index peaking at 2298 bps over government bonds on 18th December. This therefore meant a massive increase in the cost of borrowing for sub-investment grade companies, which had been spoiled for many years with extremely low financing costs.

But spreads have tightened considerably so far this year and a handful of companies have taken advantage of the improved sentiment to return to the debt market. German medical company Fresenius was the first, issuing new bonds maturing in 2015 with a 8.75% coupon back in January, and in the past couple of weeks paper company Stora Enso and Dutch cable operator UPC have tapped existing issues (both coming on the back of reverse enquiries from existing bondholders). On top of this, yesterday saw a new five year issue from drinks company Pernod Ricard, which priced to yield approximately 400 bps over government bonds, and today Virgin Media is issuing bonds with euro and dollar tranches, slated to yield around 10.25%, in order to prepay some of its outstanding secured loans.

This is obviously good news for the high yield market, which has been pretty illiquid for some time. We’re not getting carried away though. So far we have only seen new issues from the higher rated end of the credit spectrum (Pernod is rated BB+ by S&P for example), and from names that the market is pretty comfortable lending to. Many of the more aggressive high yield companies are unwilling or frankly unable to raise capital in either the bond or equity markets. Restructurings and defaults are still the likely order of the day for many of these businesses despite the improving risk sentiment.