Reuters: Bankruptcy News: European high-yield market raises barricade

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European high-yield market raises barricade Mar 23rd 2012, 14:52 By Natalie Harrison Fri Mar 23, 2012 10:52am EDT LONDON, March 23 (IFR) - Riskier leveraged companies looking to refinance maturing loans with euro-denominated high-yield bonds face higher funding costs and a growing risk of being shut out of the market as investors become more discerning about moving down the credit curve. A EUR300m high-yield bond backing the buyout of specialty steel firm Ascometal failed to price as expected by Friday, despite offering a yield in excess of 12%. Lead managers Bank of America Merrill Lynch and Morgan Stanley said the bond "will come when it comes". But the signs are not promising, bankers said, especially if the deal could not be pulled off even after a two-week roadshow across Europe and the U.S. that was seen as excessive for a relatively small EUR300m deal. The Ascometal bond, rated B3/B- - aims to refinance a bridge loan stuck on the balance sheets of BAML and Morgan Stanley since last summer - has cast doubt on whether other riskier deals in the pipeline will also struggle. A recent softening in the market, and a marginal fall in some recent new issues, also makes it unlikely that we'll see a repeat of the flood of riskier deals that hit the market last Spring, bankers said. "The market has already gotten considerably softer over the last few days," said one high-yield syndicate banker. "If you stand back and look at the bigger picture, European high-yield returns are over 11% for the year. That's pretty high, and suggests we could be due for a pullback." Next to test risk appetite is a split-rated Triple C/B- euro-denominated bond from U.S. software company Lawson, which is looking to access the euro market for the first time next week as signs emerge of a bifurcated market. "Investors are showing a strong preference for larger, more liquid issues from companies with solid credit stories, rather than reaching for more marginal stories and smaller deal sizes," said Mathew Cestar, head of leveraged finance in EMEA at Credit Suisse. "Investors are acutely aware of the liquidity risk, particularly given their recent experiences in the second half of 2011." That view is backed up by a growing divide between the cost of funding for issuers at the top and lower ends of the rating scale, suggesting cash is veering to the top quality credits. German healthcare group Fresenius, for example, priced a EUR500m deal at just 4.25% this week - lower than some investment-grade companies like ArcelorMittal. A rescue deal for Northern Irish utility Viridian, meanwhile, priced at a 12% yield earlier this month and has since dropped to a price of 93 after its parent Arcapita unexpectedly filed for bankruptcy protection this week. HIGH-YIELD LIMITATIONS Chetan Modi, senior vice president at Moody's, said there were limitations on how much debt can be refinanced with high-yield bonds. "Some structures with excessive leverage will have to be restructured before they can go out to capital markets," he said. The rating agency estimated in May 2011 that around 20% of the EUR180bn of unrated European leveraged buyout loans maturing over the next four years was sufficiently stressed so that only a small portion could be refinanced with high-yield bonds without some form of capital restructuring. "That assessment was made before the shutdown in the market (in H2 2011)," said Modi. "If anything, that 20% figure is likely to be higher. Not only was six months lost in the high-yield market, but now that it has come back, credit is more expensive across the board. That will set higher hurdles for some companies." April and May 2011 were particularly notable months for a raft of riskier, Triple C deals from debut issuers -- including Gala Coral, Heckler & Koch and Heidelberger Druckmaschinen -- that turned out to be among the most volatile as conditions turned sour in the summer. All three are still mired in a 65-75 price range, according to Tradeweb, and Moody's recently cut H&K by one notch to Caa2, citing risks that the company may struggle to service its debt. "We have seen a numbers of deals this year that should not have got done. Once we had dug deep into some of those, the capital structure all looked very wrong and they were easy to pass on," said Melanie Mitchell, high-yield fund manager at Kames Capital, who included Numericable and Viridian in that list. "I don't think that this is a push by banks to get market share, but more a push to get things done while the market is hot. We're a lot wider than we were a year ago, but having experienced how close you can get to the precipice, I think we're all a bit wiser about how bad things can get," said Mitchell. BAML and Morgan Stanley are certainly keen to get Ascometal away. One banker away from the deal said that the 12%-plus coupon that investors were being guided towards suggested the underwriters would probably make a significant loss. "The fact is they have to get that off their books," said the high-yield banker. "I have heard that the cap rates are pretty tight. What that means is that they can price the bond up to that coupon level (cap rate) with an Original Issue Discount which becomes their loss net of any fees to offset it." Link this Share this Digg this Email Reprints

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