Fitch sees European high-yield market poised for record year in 2005

St. Louis, Jan. 19 - Fitch Ratings expects 2005 to be another record year for the European high-yield market, given some very large new leveraged buyouts in the pipeline, according to a report published Wednesday.

The report, prepared by Fitch analysts Roger Coyle, Rachel Hardee and Daragh Murphy, states that 2004 saw a record €29.3 billion of new issuance, driven by a combination of new LBOs, recapitalizations and secondary buyouts, "fallen angels," the rehabilitated cable sector and a number of non-LBO corporate issuers. Fitch believes that the conditions remain for continuing issuance in each of these sectors.

Fitch also expects the combination of very high and ever increasing financial leverage and extremely tight pricing that were seen in the European high-yield market in 2004 to continue in 2005. However, as a growing number of arranging banks compete for business and put forward increasingly aggressive structures, it is more and more likely that some new issues will be rejected by investors.

More jumbo deals possible

A number of very large or "jumbo" European LBOs are likely to boost high-yield issuance in 2005.

The financing for the recently agreed acquisition of Amadeus in Spain is expected to include €1 billion of high-yield bonds. A potential bond issue to back the acquisition of Italian telecom operator Wind could be even larger. With private equity firms raising larger and larger funds and increasingly prepared to team up and bid for larger assets, more jumbo deals are likely to emerge, the analysts said in the report.

With bond spreads tightening in secondary trading during 2004, pricing on new issues reached record lows. While the 5.2% coupon on Remy Cointreau's bond issue in the first week of 2005 was driven by name recognition and a scarcity of BB credits, it does call into question the use of the term "high yield."

Narrow spreads may persist

Fitch said it believes that while further declines in European high-yield pricing will be limited, the conditions remain for the current narrow spreads to continue during 2005.

The agency believes that structures will continue to become more aggressive in 2005 and the average leverage multiple is likely to increase as recapitalizations and secondary buyouts continue to be the most common exit route for private equity firms and as investors continue to accept higher leverage on these transactions.

Rising financial leverage, which is being facilitated by strong investor demand, is also being driven by the supply side of the market.

LBO structures result not only from the high acquisition multiples that derive from competitive auctions between cash-rich private equity bidders but also from competition between a growing number of banks bidding to arrange the debt. This trend is not only reminiscent of the last peak in the European high-yield market but also contributes to rising leverage levels.

With so many banks competing to lead deals, increasingly aggressive structures are likely to be put forward to win mandates.

© 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.