Second-lien issuance in Europe sky-rocketed in the second quarter, hitting €1.8 billion--or three times the average quarterly volume since the asset class made its appearance in Europe toward the end of 2003, according to Fitch Ratings. While a lot 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. High-yield new issuance for the first half dropping from €17.7 billion to €12.8 billion year-over-year. This growing comfort with second liens, could continue to eat into high-yield bond volumes going forward, say market participants.
"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. Investors are also keen on it, particularly hedge funds and increasingly collateralized debt obligation investors and high-yield investors.
Examples of companies having chosen second liens over high-yield bonds include U.K retailer Debenhams and Finnish bathroom products manufacturer Sanitec, which both refinanced their high-yield bonds with second-lien debt in the second quarter.
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.