High-yield issuers may have missed the boat

4 min read
Lorena Ruibal

European high-yield issuers that missed out on August's rally are finding themselves wrong footed once more with Russia’s shutdown of a key gas pipeline to Europe likely to keep inflation elevated, prompting further monetary policy tightening and upping funding costs.

Bank syndicates and investors were hoping that the broad market rally seen last month would extend into September, opening a window of opportunity to launch some of the deals that have been sitting on banks’ pipelines for months due to choppy market conditions.

A high-yield portfolio manager said that a syndicate team of a large investment bank has approached the asset manager to discuss potential transactions, but he is sceptical that investor appetite for new debt will strengthen before signs emerge that inflation has peaked and central banks are slowing the pace of rate rises.

“It's tough to justify going to the primary market to add risk outright,” he said. This view is shared by many euro high-yield real money managers.

In a historic move, the European Central Bank raised the deposit rate by 75bp from 0% on Thursday in reaction to mounting fears that soaring prices are becoming embedded despite concerns the eurozone may slip into recession.

Inflation surged to 9.1% in August, the bloc’s highest-ever level, and could jump even higher on the back of Russia's indefinite shutdown last week of gas supplies through Gazprom's Nord Stream 1 pipeline to Germany as the region heads into winter.

Similarly, the Fed is projected to deliver its third consecutive 75bp interest rate increase later this month, dashing hopes of a slowdown in the pace of rate rises following last month’s weaker-than-expected inflation print, which triggered a broad rally in risk assets.

While risk appetite improved during August, potential euro high-yield issuance was hampered by thinly-staffed desks at both banks and investment firms, said a second high-yield investor.

This has further clobbered issuance volumes which led ING to revise its 2022 forecast down sharply.

"While we may end up being too conservative, it appears that our full-year 2022 primary EUR-denominated corporate supply target of €35bn is optimistic and may need to be adjusted down after gross issuance of approximately €13bn during the first eight months of the year," the Dutch bank said.

Euro spreads, as measured by the ICE BofA Euro high-yield index, widened by around 33bp from a low of 399bp on August 23, completely retracing the previous tightening in the month, according to Refinitiv data. Total returns from Europe’s riskiest debt have also extended losses and are now down 12.419% year to date.

Bustling pipeline

Nonetheless, syndicate bankers have been sounding out investors on an array of transactions, including bonds backing M&A financing as well refinancings, in the hope of being ready to launch transactions at the slightest opportunity.

There are several names with notes coming up for repayment in 2023 including Italian medical device group LimaCorporate, Denmark’s telecom firm TDC Group and machine manufacturer Norican Global, all of whom could launch public debt offerings, according to market participants. Others, such as chemical group Italmatch Chemicals and paper manufacturer Fedrigoni, with bonds due in 2024, may also seek to refinance debt, they said.

People with knowledge of the deal said that Fedrigoni could appear soon after Italy's elections on September 25.

Also, the management team of French telecom company Iliad said they would explore issuing debt.

CreditSights Mark Chapman and Alex Lawrence said in note Iliad could opportunistically come to market and that exposure to the firm could be very attractive for investors. They see issuance in the coming months as “more-likely-than not” as long as reasonable new issue economics can be achieved.

Euro high-yield supply could also come from financing packages backing leveraged buyouts underwritten before the market turned lower earlier this year, which banks are eager to offload them from their balance sheets. First in line are: Bain Capital Private Equity’s majority buyout of House of HR, CVC Capital Partners' purchase of Unilever's tea business Ekaterra and Israeli outdoor plastic furniture maker Keter Group.

The question now is who will fire first the starting gun and when.