ADVERTISEMENT

High-Yield Bankers Fear Another Slow Quarter for Sales in Europe

High-Yield Bankers Fear Another Slow Quarter for Sales in Europe

(Bloomberg) -- Bankers expect sales of high-yield bonds in Europe to remain depressed through the second quarter of 2019 owing to a sharp slowdown in M&A activity, as well as still relatively high funding costs that are deterring opportunistic issuers.

Falling bond yields, a narrowing iTraxx Crossover Index and sustained fund inflows failed to boost new issuance volumes during the first quarter. Bond sales totaled 10.2 billion euros ($11.3 billion) in the first three months, down 45 percent on the same period of last year, according to data compiled by Bloomberg.

“There’s been a dearth of supply and we don’t foresee the second quarter being materially different,” said Kevin Foley, head of EMEA loan and high-yield capital markets at JPMorgan Chase Bank NA. “Outside of M&A, there’s not a huge need for issuers to come to the market in the near term.”

While dialogue regarding upcoming M&A transactions is active, the deals that fund them are unlikely to materialize until the second half of 2019, Foley said. This doesn’t bode well considering the new issuance pipeline is expected to be heavily dependent upon M&A activity, the banker added.

A case in point is the financing put in place earlier this month to fund the acquisition of a battery unit of Johnson Controls International Plc by Brookfield Business Partners. Better pricing dynamics in the leveraged loan market meant that Europe’s bond market only received 700 million euros of the $10.1 billion-equivalent bond and loan package.

High-Yield Bankers Fear Another Slow Quarter for Sales in Europe

BB Sweet Spot

Even for non-M&A related issuance, supply could remain at the mercy of wider risk-off sentiment given persistent fears about a deterioration in corporate earnings and slowing economic growth. Corporate defaults for European high-yield may rise from 0.2 percent to 2 percent over the next 12 months, analysts at UBS AG said in a March 27 client note.

Complex credits or subordinated debt deals were almost non-existent in Europe during the first quarter. Around 80 percent of the transactions to price this year have come from double B-rated borrowers, Bloomberg data show.

Earlier this week a special purpose vehicle of Dutch leasing company LeasePlan Corporation NV became the first borrower to market holding company debt in 2019. The 1.35 billion euros two-part debt sale priced on Wednesday after a three-day roadshow in London, Amsterdam and Paris.

“The market has shifted this year and people are not chasing ‘the rubbish’ anymore,” said Adrian Hull, head of fixed income at Kames Capital Plc, which manages assets totaling 37.2 billion pounds. “Credits and situations can quickly turn negative.”

Hull said the firm is still being very selective on new issues for that reason and “so far that’s paid off.” He added that “BB + and single B- continue to be our sweet spots and have performed well.”

Returns are looking decidedly better in the first quarter after ending 2018 deeply in the red. The Bloomberg Barclays Pan-European (ex Fin) Index is showing a total return of 5.6 percent so far this year.

High-Yield Bankers Fear Another Slow Quarter for Sales in Europe

Bright Backdrop

Shrinking yields may pull some opportunistic borrowers off the sidelines in the second quarter though, especially as issuers are recognizing how quickly market conditions can change, JPMorgan’s Foley said.

Corporate borrowers have been able to cut pricing for the first time in recent weeks as benchmark index yields have fallen to 4.4 percent from 5.4 percent in January. Moreover, the asset class in Europe has seen inflows of $3.6 billion so far this year, according to Bank of America Merrill Lynch analysts citing EPFR Global data.

The market will now be looking to the next batch of supply -- especially from lower rated names -- as a test for investor appetite. Among deals waiting in the wings is United Group BV’s planned payment-in-kind toggle notes that will back the company’s acquisition by BC Partners. Timing for that subordinated debt sale was slated for January, but the deal is yet to emerge.

“I’m not sure about the market being open to all triple C credits right now, but it all depends on how much protection you’re offered,” Kames’ Hull said.

--With assistance from Marianna Aragao.

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, Charles Daly

©2019 Bloomberg L.P.