Balance Tipped in Borrowers' Favor in Europe's High-Yield Market

(Bloomberg) -- Corporate debt borrowers have been able to cut pricing for the first time this year as the supply-demand balance in Europe’s junk bond market has tipped back in their favor.

Just last month high-yield borrowers were forced to pay eye-watering premiums to get their deals over the line as they grappled with the overhang of the fourth quarter’s volatility. But the situation is changing rapidly as swelling cash balances rekindled appetite. Inflows have totaled about $1.3 billion this year.

"A lack of new supply has supported the secondary market and borrowers are in a strong position again as there’s a lot of cash to invest thanks to inflows into the asset class year-to-date," said Marina Cohen, who manages the equivalent $8 billion of assets as the head of European high yield bond portfolio management at Amundi.

Cohen has been mainly invested in the secondary market this year, and has slightly increased the fund’s weighting to single B credits on a name by name basis. Stunted issuance, resulting in bond sales down 59 percent year on year, has helped a 123 basis points tightening in high-yield spreads since early January.

The drop in secondary yield rubbed off on the primary market as well, helping borrowers. Yield on Bloomberg Barclays Pan-European High Yield Index have fallen from highs of 5.1 percent from the start of the year, to around 4 percent

Price cuts

All four issuers this week, including Power Solutions, were able to cut the pricing on their respective bond deals during the marketing process. The end result left investors with little pricing upside versus the start of the year.

The $750 million dollars-equivalent bond backing the buyout of a Johnson Controls International unit was said to be well oversubscribed, despite the $10 billion debt package drawing widespread ire from investors for its aggressive terms. The note is due to price on Friday.

Read More: Buyout Debt for Johnson Controls Unit Whips Up Investor Frenzy

Elsewhere, investors swarmed around the week’s double B rated names. Orders for paper packaging company Sappi Papier Holding’s 450 million euros ($509 million) deal topped 1.8 billion euros, according to a person familiar with the matter. Meanwhile, a 400 million euros deal from cement maker Cemex drew around 1.8 billion euros of demand.

This week’s pricing shift comes in sharp contrast to earlier in the year when borrowers were forced to pay an excess of as much as 100 basis points in order to access the market. Should the borrower friendly environment continue, it may spur issuance from riskier credits, which have all but disappeared this year.

For now though, some investors are staying cautious on lower-rated names after suffering steep secondary market losses in the fourth quarter of 2018.

"We’re back on the hunt for yield due to the low rate environment but we remain selective as we think there are still lots of specific risks," Cohen said. "So far the market is outperforming expectations and we’re unsure of how long this will last."

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

To contact the editors responsible for this story: Sarah Husband at shusband@bloomberg.net, Vivianne Rodrigues, V. Ramakrishnan

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