FRNs gain share of high-yield market as liquidity wanes

4 min read
EMEA
Lorena Ruibal

The recently found popularity of floating-rate notes is set to continue into the second half of the year as European high-yield issuers seek to maximise liquidity amid dire market conditions.

While FRNs are typically a more attractive product in a rising interest rate environment, strong issuance this year has also been driven by liquidity constrains.

“FRNs are allowing companies to maximise the amount of liquidity in the market by tapping a wider pool of investors,” said a leveraged finance expert. Issuers are trying to tap institutional loan investors, CLO managers, as well as the traditional high-yield community to raise cash, he said.

An investor said that FRNs are an easier product to pitch at the moment, as traditional investors like himself have had very little appetite for fixed-rate high-yield bonds, and CLO buyers have been happy to step in.

“[Issuers] will want to open up as many doors as they can by issuing different flavours of bonds,” he said.

This was probably the case with BestSecret, the investor said. The German online retailer’s parent company, PrestigeBidco, in mid-July sold €315m in five-year non-call one senior secured floating-rate notes at 600bp over Euribor and an OID of 85, paying up to refinance a 6.25% December 2023 fixed-rate note.

There have been no further high-yield bond sales since but the market is likely to reopen in September, as sentiment is picking up, market participants said. Issuers tipped to tap the market with bond offerings include Italian paper manufacturer Fedrigoni, Belgium-based HR group House of HR and Unilever’s tea business Ekaterra.

These issuers are expected to split larger financing deals into different tranches, mixing FRNs with fixed-rated bonds.

European FRN issuance has hit €11.26bn so far this year, making up around 42% of the total high-yield bond issuance. If that market share is maintained through to end of the year, the portion of FRN issuance would more than double that of 2021. It would also mark the product's highest share of annual European high-yield issuance since 2007, data provided by Fitch showed.

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FRNs were a dominant feature in the European high-yield market for the first months of this year, when rising interest rates were the chief concern for investors. After February, demand for corporate bonds took a hit from market volatility, driven by Russia's invasion of Ukraine, which sent energy and food prices spiralling, forcing central banks to speed up interest rate rises to rein in inflation. Economic outlooks darkened and recession fears grew.

This brought the high-yield market to a complete standstill, until UK builder Miller Homes priced in early April the first high-yield bond deal in three months.

The heavily pre-marketed deal included an FRN to tap the increased demand for this structure from CLO buyers, as the loan market initially held up better than the fixed-rate segment, the leveraged finance expert said.

After increasing compensation to investors, the company raised a £425m 7% bond at a yield of 8.25% and an OID of 93.45. The €465m FRN priced at a 525bp spread over Euribor with an OID of 97.

Since then, FRNs have been a recurrent feature in larger bond offerings. Some of their appeal has been also related to their stronger performance.

Euro high-yield fixed-rate bonds have performed worse than FRNs in cash price terms, as they are more sensitive to interest rates, which has led high-yield investors to develop a more positive view on the latter, an instrument they normally dislike because of the limited upside in capital appreciation, said the leveraged finance expert.

FRNs have tended to perform better this year, though the recent rally in rates has boosted fixed-income securities. Online gambling company 888 Holdings' €400m 7.558% five-year non-call two senior secured note launched at a huge discount to par at 85.346 and is now trading just over five points higher, while its €300m six-year non-call one FRN, which launched at an OID of 85, is quoted 5.5 points higher, according to Refinitiv data. The two-tranche deal priced last month.

Corrected story: Corrects name of company in seventh paragraph to House of HR.