Rock Bottom Junk Yields Tempt Companies to Quit Private Credit
2021-04-26 07:34:40.74 GMT

By Ruth McGavin
(Bloomberg) — Europe’s fast-growing private debt market is
facing heightened competition from the cheaper financing now
available in high-yield bonds and loans that’s already luring
away corporate borrowers.
Live-commerce firm Home Shopping Europe GmbH last week
raised 630 million euros ($759 million) of high-yield bonds to
replace a private debt facility and pay a dividend to owner
Providence Equity Partners, according to people familiar with
the matter who asked not to be identified as the information is
private.
It follows internet services firm Team.blue which raised a
loan in March in part to repay debt, having previously used
private funding at one of its divisions.
These deals mark rare exits from Europe’s private debt
market, which has expanded rapidly since the global financial
crisis to more than $280 billion under management, from $44
billion a decade ago, according to data provider Preqin.
Deal sizes are typically smaller than syndicated loans or
bonds. But as the market matures, a number of private debt funds
have emerged with capacity to lend 300-500 million euros or more
to a single company, presenting a significant challenge to
traditional public credit markets.
But the case for bonds and syndicated loans has
strengthened this year as heavy demand from yield-hungry
investors pushes borrowing costs lower.
The new fixed rate bonds for Home Shopping Europe priced on
April 23 to yield 5.625% while the average yield on European
junk bonds has dropped to around 2.5% from more than 6% a year
ago, according to a Bloomberg Barclays index. Meanwhile, bankers
are increasingly pitching bonds and syndicated loans to
companies that might be persuaded to make the switch.
“Given the strength of the market, I think we will see some
cases for sure where going down the leveraged loan or bond route
might be an alternative to the current unitranche,” said Paul
Bail, head of debt advisory at Baird.
Home Shopping Europe will use the proceeds to repay debt
worth just under 400 million euros and fund a 242 million-euro
dividend, according to a report from Spread Research. The
company financed itself via term loans in the past before
turning to the private market. The unitranche now being repaid
was provided by direct lender Hayfin, according to two of the
people familiar with the matter.
Spokespeople for Providence and Hayfin declined to comment.
It’s not just the potential to lower the cost of debt that
could prove tempting. Syndicated loans are easier to repay and
carry documentation that’s less restrictive than private debt
financing. Loans and bonds also expose the company to a more
diverse range of investors.
But not all companies will want to make the shift. A direct
lending facility spares borrowers the obligation to secure a
credit rating and comes without the disclosure requirements of
public debt. Companies can also raise additional funds swiftly
when they want to make an acquisition, without the protracted
process of putting together a new bond or loan transaction.
“In a lot of situations, the flexibility that direct
lending funds have offered for buy-and-build strategies has
proved to be pretty compelling,” said Bail.