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Germany in charge of Europe’s new high yield market

Germany has provided the biggest slug of high yield issuance in Europe since the financial crisis and 2011 has been no different. Buyers have eagerly lapped up German companies buoyed up by strong ratings, solid reputations and a willing domestic investor base, as Stefanie Linhardt reports.

  • 23 Nov 2011
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Hangovers tend to get worse with age, and some parts of the seasoned global high yield sector are still shaking off the after-effects of a debt binge that peaked just before the financial crisis blew up in 2008. In the early part of 2011 there was a sudden record-breaking surge of European high yield issuance but in some countries, the asset class has been in rude health for some time.

German companies, for example, have been the most active issuers of European high yield bonds since the crisis. According to Henrik Johnsson, head of European high yield capital markets at Deutsche Bank, that’s partly because many firms in the country’s industrial-based economy prefer fixed rate, long maturity debt for their financing.

Differences in image play a part too. With solid, well-rated industrial names among its champions, the German high yield sector tends not to suffer from the racy image that junk debt has in some other markets. Getting in early also helped. "German companies were the early movers at a time when issuing high yield did not have the same stigma in Germany that it might have had in other places," says Johnsson.

There has also been a change in the perception of German exposure, says Per Wehrmann, European corporate high yield fund manager at DWS Investments in Frankfurt.

"In 2001/2002, Germany was considered the sick man of Europe, and companies with big exposure to the German domestic market were considered more negative," he says. "Now sentiment has turned around and it is considered positive if a company has a good exposure to Germany."

German issuers have certainly been busy. Almost 20% of the $140bn in European high yield issuance since 2009 has come from German companies, according to Dealogic. In 2011, they sold 22 of the region’s 117 deals, accounting for 20% of volume.

German dialysis company Fresenius Medical Care, which first issued in 2007, is one of Europe’s most frequent high yield borrowers — and one of its best rated. At Ba1/BB, it is on the cusp of investment grade.

Fresenius CFO Michael Brosnan likes the flexibility the asset class gives the company. "We typically use debt to finance our acquisitions and we think that there are still lots of opportunities to grow particularly in the international markets — Eastern Europe, Russia, Asia, Latin America," he says. "We are very comfortable with being just a notch below investment grade."

The company reopened the European and US high yield bond markets this autumn, its September deal being the first since the end of July. The deal, led by Credit Suisse and JP Morgan, joined by bookrunners Barclays, Morgan Stanley and Société Générale, comprised €400m and $400m tranches of fixed rate debt, as well as a €100m floating rate tranche. Proceeds were to finance the $400m acquisition of American Access Care Group and to increase overall liquidity levels.

"That we can issue simultaneously in both markets gives us an opportunity to get the best possible pricing and the issues were very well received," says Brosnan. He says this will help the company when it returns in January to finance its $1.7bn acquisition of Liberty Dialysis, another US firm.

The record-breaking European high yield issuance volumes in early 2011 encouraged debut issuers to the market, including in Germany. Berlin-based waste management and recycling firm Alba Group was one of them. The family-owned company raised €203m from a senior unsecured bond issue in April, partly to finance the further integration of its listed Interseroh business.

But the choice of bond market financing was also driven by broader changes to the bank lending climate, says CFO Markus Guthoff. "We decided to access the high yield bond market to improve our capital structure [...] and because the financial crisis of 2008 and 2009 has given reason for financial disintermediation because of a notable retreat of banks’ lending willingness," he says. "For all these reasons, we thought it was the right time to enter the capital markets."

Investors thought so too. The book was more than seven times oversubscribed, with about €1.5bn of orders. The B3/B rated issue priced with a yield of 8% and the deal was the first European high yield bond from the recycling sector. Deutsche Bank was lead left, joined by bookrunners Commerzbank, IKB, UniCredit and WestLB.

Home advantage

As well as the improved perception of German names — and the relative lack of stigma attached to high yield in the country — German issuers are helped by a strong and active retail investor base, quite different to the reliance on large institutional investors seen in the UK market, for example.

Well-known names in particular can benefit from this — and have been helped by changes to German bond legislation in 2009 that introduced concepts such as permitting covenant waivers to be agreed by a majority of bondholders. Marc Plepelits, a partner in the corporate group at law firm Shearman & Sterling in Frankfurt, says that while companies could in theory issue under the previous legislative regime, in practice it was unattractive to do so for deals with extensive covenant packages — like high yield bonds.

The changes give German companies an alternative to issuing under New York law — previously the typical route. Companies that target their home market or who did not want exposure to foreign legal risk, that can be handy. "With the change in Germany’s more than 100-year old bond law, we saw a lot of activity last year, when Continental, Kuka, HeidelbergCement and other issuers came out with high yield issuances under German law," says Plepelits. But the preference for New York law continues, he adds, and has been seen in this year’s deals.

  • 23 Nov 2011

All International Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 27 Oct 2014
1 JPMorgan 278,914.39 1111 7.98%
2 Barclays 251,894.67 869 7.21%
3 Citi 250,194.86 968 7.16%
4 Deutsche Bank 244,474.93 992 7.00%
5 Bank of America Merrill Lynch 240,849.72 857 6.89%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 28 Oct 2014
1 Deutsche Bank 48,610.51 125 7.60%
2 BNP Paribas 45,308.93 185 7.08%
3 Citi 34,756.99 97 5.43%
4 Credit Agricole CIB 31,024.72 128 4.85%
5 JPMorgan 30,825.29 75 4.82%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 28 Oct 2014
1 JPMorgan 23,809.73 114 9.33%
2 Goldman Sachs 22,933.11 77 8.98%
3 Deutsche Bank 20,595.54 76 8.07%
4 UBS 19,729.52 81 7.73%
5 Bank of America Merrill Lynch 19,079.80 69 7.47%