In Europe’s High-Yield Market Even the Best is Below Average
2020-01-31
By Laura Benitez
(Bloomberg) — Even the best yields on some of the riskiest
bonds in the market are low in historical terms as investors’
pile into junk debt.
The bonds backing Banijay’s acquisition of the Dutch
production company behind the TV show ‘Black Mirror’, for
example, are expected to offer buyers yields of between 6 to 7%
on the lowest-rated tranche of the subordinated debt. While
that’s one of the highest rates in months, the proposed coupon
is still below the 8.2% average yield for the CCC+ rating, as
measured by Bloomberg’s Barclays CCC index.
The clamor for yield is heating up amid prospects of
lackluster returns this year, and so far junk-rated borrowers
have capitalized by cutting pricing and upsizing their
offerings. Yields on European junk bonds have fallen to around
3.4%, hovering near all time lows, according to Bloomberg’s
Barclays index data.
If the deal to finance the French media company’s purchase
of Endemol Shine Group goes ahead in the 6 to 7% range, it would
become one of the rare higher yielding securities offered to
investors in Europe’s junk bond market.
Greek Infrastructure company Ellaktor SA came to the market
with a 600 million euros deal in November at 6.375%, while Greek
maker of retail refrigerators Frigoglass SAIC this week priced a
260 million euros deal at 6.875%
The Banijay deal became the first this year to test
investors’ threshold for riskier paper and highly leveraged
borrowers, amid a glut of better rated issuers with well-known
capital structures.
“The market has not been tested for such aggressive M&A and
complex deal in a while,” Joan Sehim, an analyst at Spread
Research, wrote in a note to clients.
Those opting for the higher yields offered for the junior
subordinated portion of the debt will have to get comfortable
with the company’s “high net leverage, which leaves very little
room for under-performance,” the analysts wrote. Investors said
that some may even buy the lower rated notes in a bid for better
allocations on the deal’s 525 million euro senior secured
tranche, which is being guided in the 4% range.
“While Banijay has a successful track record of integrating
and retaining creative assets, we are uncertain how well it is
equipped to continue thriving as market conditions change,”
analysts at Lucror wrote in a note to clients.
Frothy Market
The return of CCC-rated instruments and payment-in-kind
notes, which were popular in the run-up to the financial crisis,
are slowly making a return in response to the appetite for
increased risk.
Luxury clothing designer Isabel Marant Diffusion SAS is
marketing a 200 million euro deal to pay itself a dividend this
week, a transaction type that typically signifies a frothy
market.
The deal will also provide a payday for sole bank JP Morgan
Chase & Co., who stand to gain chunky fees for arranging the
deal. The borrower will pay around 8 million euros in
underwriting and other fees, according to people familiar with
the matter said.