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Blackstone Cashes In on Europe’s Frothy Junk Bond Market

Blackstone Cashes In on Europe’s Frothy Junk Bond Market

(Bloomberg) -- The emergence of racier high-yield bond deals in Europe may be pointing to a market that’s reaching its top.

Take Blackstone Group LP as an example. The private equity sponsor plans to leverage off investor hunger for yield and pay itself a dividend using cash generated from the sale of bonds rated seven levels below investment grade.

Blackstone Cashes In on Europe’s Frothy Junk Bond Market

Proceeds of the notes will allow Blackstone to take back over half of the 710 million euros ($781 million) of equity it injected into Cirsa Gaming Corp SA just a year after acquiring the Spanish gaming company.

The 400 million euros deal, which was upsized by 25 million euros, has been given a CCC+ rating by S&P Global Ratings. Order books on the transaction are expected to close Wednesday and current price talk is 7.25% to 7.5%, according to a person familiar with the matter.

While CCC-rated notes to finance shareholder dividends typically signify a frothy market, Cirsa and Blackstone are taking it one step further. The transaction is structured as payment-in-kind (PIK) bonds, which give the borrower the option to repay interest with more debt and were a popular feature in the run up to the financial crisis.

“The business has an excellent track record but you have to justify the PIK structure, CCC rating and dividend payment to the sponsor just a year after buying the business,” said George Curtis, a credit analyst at TwentyFour Asset Management in London. “This is a fairly aggressive move from Blackstone who are taking advantage of a market desperate for yield.”

Blackstone representatives did not immediately reply to a request seeking comment.

Other analysts and credit rating firms have also been quick to respond to the proposed PIK notes. S&P downgraded Cirsa’s rating to B after the deal was announced, citing the financial sponsor’s “aggressive financial policy,” while in a note to clients on Tuesday analysts at CreditSights Inc. said the use of proceeds and deal structure were red flags.

“Ultimately, this PIK investment decision trades off the warm and fuzzy feelings that the Cirsa credit itself brings, with the hard-nosed shareholder actions to derisk its acquisition with indecent haste,” CreditSights analyst Helen Rodriguez said.

‘Racier Deals’

Cirsa is not the only borrower testing the temperature for risk in Europe this week. Monitchem Holdco, parent of European specialty chemical company CABB Group, is sounding out interest for 490 million euros of CCC-rated debt.

Elsewhere, Aston Martin Lagonda Global Holdings Plc has raised $150 million of bonds that carry a 12% coupon, half of which can be paid as PIK interest. S&P has also rated those notes CCC+.

So far this year 2.08 billion euros-equivalent of CCC-rated corporate bonds have priced in Europe compared with 3.40 billion euros last year and 5.66 billion euros in 2017, according to data compiled by Bloomberg.

“These types of deals can be indications of a frothy market,” said Azhar Hussain, head of global credit at Royal London Asset Management, who manages 4.9 billion pounds of assets. “Although because there’s still a lot of investor discipline, it’s creating an opportunity for better quality credits to do racier deals and stretch the boundaries.”

Read more on the deals:

To contact the reporter on this story: Laura Benitez in London at lbenitez1@bloomberg.net

To contact the editors responsible for this story: Vivianne Rodrigues at vrodrigues3@bloomberg.net, Charles Daly

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