Wednesday, 12 December 2018

Europe High-Yield Bond House: Deutsche Bank

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Getting ahead

For bringing the full sweep of issuers to market in both good times and bad, while avoiding the pitfalls that befell others, Deutsche Bank is IFR’s Europe High-Yield Bond House of the Year.

The European high-yield market had a tricky year in 2015.

The start of the European Central Bank’s €1.1trn quantitative easing programme made for an incredibly buoyant start to the year, allowing seasoned issuers to slash coupons and coaxing many US issuers into the market for the first time.

But then a sharp back-up in rates later in the spring wrong-footed many, with a nail-biting stand-off between Greece and its creditors following shortly after.

European high-yield saw a massive eight pulled deals during the tumultuous period, five of which were yanked from the market after price talk was set. The year also saw several high-profile mistakes, most notably a backstopped deal for OHL that proved costly for underwriters in March.

Deutsche Bank tackled these challenges head-on, however, without making any tactical missteps.

“When markets get choppier, that’s when we add the most value,” said Diarmuid Toomey, a director in the bank’s high-yield capital markets division. “It’s about consistency. Anyone can sell a deal when markets are hot.”

Nowhere was this steely resolve seen more clearly than in Deutsche’s two deals bookending the latest Greek crisis.

Deutsche sold the last deal before nerves around Greece shut down the market entirely: a six times leveraged LBO of German retailer Douglas. Despite the rapidly deteriorating market backdrop, Deutsche cleared the punchy deal within cap rates, using demand for the term loan to work down the amount needed in bonds.

The bank was also first to pull the trigger as the situation in Greece relaxed, announcing a roadshow for Japan’s SoftBank on July 14, following the initial agreement of a Greece bailout but crucially before parliament had approved necessary reform measures.

The five-tranche euro and US dollar deal aimed to term out the telecoms firm’s debt beyond what is achievable in the domestic yen bond market, but came to market on the back of a sharp sell-off in higher-rated and long-dated paper. To make life even more difficult, regulatory reasons meant SoftBank had to issue Reg S only for the first time, meaning it could not tap accounts in the US.

“We knew a lot of supply was coming and we wanted to get ahead of that, particularly as we were trying to sell 12-year debt into a difficult market,” said Henrik Johnsson, head of EMEA high-yield and loan capital markets.

SoftBank sold the €4.1bn-equivalent deal without a hitch on July 22, including the much coveted €500m 12-year tranche. In stark contrast, a group of banks were unable to fully sell a 12-year euro bond for Liberty Global’s Telenet on the same day, having to take up the slack and sell it down later.

John Malone’s Liberty Global is always pushing the boundaries of what’s possible in European high-yield and Deutsche was there for its most important trade of 2015: a series of refinancings launched in January that reorganised its credit pools. Deutsche led a sterling, euro and dollar trade for Virgin Media as part of this landmark transaction.

Shepherding North American issuers into the euro market for the first time was a great revenue source for US banks in the first part of the year, but Deutsche led the standout reverse-Yankee trade: Valeant’s €1.5bn eight-year euro in March, upsized from an originally planned €750m–€1bn.

The Canadian pharmaceutical group generates very little revenue outside the the US, so the deal was purely for arbitrage. And while Valeant’s corporate governance was yet to draw intense scrutiny, the M&A trade had to weather a rival bid from competitor Endo in the middle of the bookbuild.

Finally, it’s worth casting our minds back to the end of 2014 – the start of IFR’s awards period – when market conditions were incredibly fraught. Phones 4U had gone bust in September, wiping out bondholders in dramatic fashion. With nerves around idiosyncratic credit risk in lower-rated names at elevated levels, debut issuance slowed to a crawl and most of the new names that did come had to clear at a discount.

Against this backdrop, Deutsche brought a Triple C subordinated bond backing the LBO of Siemens Audiology to market in December. While leverage was toppy – at nearly seven times – Deutsche was able to clear the debut deal at the tight end of guidance, at par to yield 8%.

To see the digital version of the IFR Review of the Year, please click here .

To purchase printed copies or a PDF of this report, please email .

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