Second-lien issuance in Europe has skyrocketed as European investors become increasingly comfortable with the product, according to Bond Week, an LMW sister publication. Fitch Ratings notes that second quarter volume reached E1.8 billion. This is over three times the average quarterly volume since this type of financing made its appearance in Europe toward the end of 2003.
While much of the increase represents a cannibalization of mezzanine debt, a significant portion is due to European issuers opting for second liens over high-yield bonds, with high-yield new issuance for the first half dropping from E17.7 billion to E12.8 billion year-over-year.
U.K retailer Debenhams and Finnish bathroom products manufacturer Sanitec both refinanced all of their high-yield bonds with second-lien debt in the second quarter--Debenhams to the tune of £300 million and Sanitec in the sum of E135 million. The E12 billion leveraged buy-out of Italian telecom provider Wind, meanwhile, is slated to issue E700 million in second lien debt in September, along with E1.7 billion in high-yield bonds.
"Quarter by quarter, the second-lien product is becoming more widely accepted in Europe and the market is becoming more established," said Michelle De Angelis, associate director at Fitch. Borrowers like second lien because it offers greater payment flexibility than high-yield bonds and is cheaper than mezz.
De Angelis was quick to add it is too early to talk about cannibalization of high-yield debt by second lien, however, given that the high-yield bond market shut down in the second quarter in the wake of the General Motors and Ford rating downgrades. "The trend is inclusive so far, but we'll be interested to see what happens in Q3 as the market picks up," she noted.