Fitch says European high-yield issuance up 35% in first half of 2006

By Angela McDaniels

Seattle, Aug. 7 - Fitch Ratings said that low interest rates and depressed defaults boosted European high-yield issuance in the first half of the year.

Big leveraged buyouts and the growing acceptance of floating-rate notes also contributed to the high level of activity even as some financings were diverted by the popularity of second-lien bank loans and mezzanine debt.

The six months saw €19.4 billion of new bonds, the market's strongest level since 2001, a 35% increase over the first half of 2005.

Despite a clear trend towards rising high-yield volumes, the market remains constrained by the low number of issuers, according to the ratings agency.

Meanwhile, strong liquidity in junior loan markets such as second-lien and mezzanine debt continues to attract mid-size European subordinated debt borrowers, Fitch said. Examples include the recent Orangina leveraged buyout for which a combination of second-lien and mezzanine debt replaced a planned high-yield issue. Similar substitutions by second-lien and mezzanine debt occurred in Gala Group Holdings plc's acquisition of Coral Eurobet Group Ltd. and the leveraged buyout of Amadeus Global Travel Distribution SA by BC Partners and Cinven earlier this year.

"Due to the continued substitution threat from more flexible second-lien and mezzanine debt instruments, new high-yield issuance has struggled to replace the high volumes of maturing bonds and tender offers in the market this year," Matthias Volkmer, associate director in Fitch's leveraged finance team, said in an agency new release.

"However, with the growing acceptance of floating-rate notes and the trend among large sponsors towards multi-billion euro transactions, high yield remains a healthy product and asset class."

In contrast to high yield, Fitch said the issuance of rated mezzanine debt grew by 117% year-over year with volumes of more than €6 billion during the first half of 2006, which in conjunction with €3.1 billion of second-lien debt issuance, corresponds to almost 50% of high-yield issuance during the same period.

While the smaller mezzanine debt market universe has grown at an average rate of 35% year-over-year since 2002 to €21.3 billion at the end of the first half of 2006, the equivalent growth momentum in the high-yield market (adjusted for cross-over volumes) has gradually slowed down to just 1% in first half of 2006 from 23% in 2002 - or an average rate of 12% over the period, according to the agency.

Mezzanine debt transactions at June 30 totaling more than €200 million in size increased to €5 billion over the last 12 months (or 36% of issuance) from only €3.4 billion (31%) at the end of 2005. The continued replacement of potential high-yield issues with jumbo-sized mezzanine tranches has contributed to the increase in the average high-yield bond size to €462 million per issuer in first half of 2006 from just €325 million at the end of 2005 and €262 million at the end of 2004, the release said.

Following low issuance levels in June, the high-yield market bounced back with a total of €3.1 billion of new issuance by NTL Cable plc, Avis Europe plc, SNF SA and Treofan Germany GmbH & Co. KG in July and VNU NV and Ashtead Group plc in the first week of August.

Taking into account eircom Group plc's €500 million floating-rate notes currently offered to the market as well as an additional €6.3 billion in the pipeline, the high-yield market remains on course to at least equal last year's issuance of €26 billion before the end of the third quarter, the agency said.

Defaults remain low

Fitch said the European high-yield market enters its third consecutive year of low defaults with a trailing-12-month rate of 0.3% or last-12-month par value default volume of €513 million for the first half of 2006, including Dana Corp. and Global Automotive Logistics SAS, down from 0.5% or €713 million at the end of 2005.

Given the increase in covenant breaches waived or amended by lending syndicates and the preference for out-of-court consensual restructurings, Fitch said it is possible that the decrease in default rates is not entirely due to improved operational performance but also to the increasing willingness of lenders and investors to renegotiate terms.

The proportion of bonds rated CCC+ and below at the end of the first half of 2006 within the rated European high-yield universe decreased to only 7.5% or €10.9 billion, compared with 9.5% or €13.7 billion in 2005 and 2.5% or €12.2 billion in 2004. The agency attributed this mainly to only 5%, or €1 billion, of new issuance rated CCC+ and below during this period.

As 86.5% of issues in this low-rated bucket are less than three years old, a significant increase in default rates during 2006 appears less likely, Fitch predicted, given the current average time to default of just over four years during first half of 2006, compared with 4.6 years in 2005.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.