Last week, Unitymedia, one of the German cable businesses owned by Liberty Global, the US telecoms investor, issued a 15 year bond. The deal came out of the blue. It was three years longer in maturity than the next-longest classical high yield bond — which happens to be issued by another Liberty Global subsidiary, Telenet of Belgium.
The deal showed the high yield market's sell side flexing its muscles in a new way. Having demanded ever tighter pricing and more favourable terms all year, now it was asking for a longer maturity.
Investors lapped up the deal, handing Unitymedia €475m in a one-day sale, at 6.25%, just 85bp wider than where the 10 year bond it had issued in April was trading.
But does the deal represent a triumph for the high yield market, or should market participants be worried?
Go back to the early 2000s. Telephone directories companies were a celebrated sector in the leveraged finance market — banks and institutions were desperate to lend to them and buy their equity.
The UK’s yellow pages unit Yell was bought out by Apax in 2001 and Italy’s Seat Pagine Gialle by a consortium including BC Partners, CVC, Permira and Investitori Associati in 2003.
The Dutch European Directories was created after a takeover of Yellow Brick Road by Macquarie Capital Alliance, Caisse de dépôt et placement du Québec and Nikko Principal Investments in 2005. France's PagesJaunes was taken over by KKR, Goldman Sachs and Eurazeo in 2006. PagesJaunes's loan syndication of 2007 was between 10 and 25 times covered, depending on the tranche.
These deals have lost investors billions. In 2012, all four restructured their debt: PagesJaunes' holding company, European Directories (for a second time), Yell (now called hibu) and Seat Pagine Gialle.
What went wrong? The internet destroyed the business model of paper telephone directories. The companies have tried to reinvent themselves for the online age, but simply haven't been able to service their large piles of debt.
The cable communications industry is a very different one. At the end of the tech boom in the early 2000s, it was the scene of many high yield bond defaults. But now that it has matured and developed, high yield investors see it as one of the most stable businesses active in the leveraged finance market.
Nevertheless, 15 years is a long time in the world of technology. Who really knows how people will be making phone calls and consuming TV and broadband in 15 years' time?
No doubt Unitymedia is a strong and creditworthy business that will repay its bond. But that does not mean the high yield market should necessarily encourage other issuers to follow its example.
Bonds of 15 years and longer are fairly common in the investment grade debt market but even there, they are usually only from more stable businesses like utilities. They exist in the US high yield market, too.
But high yield issuers, by their very nature, are more highly indebted than investment grade ones. They tend to stay highly indebted, too, as their owners like to extract plenty of cash from the businesses in the form of dividends.
That means the technology and business risk of betting on a company's operating model over a 15 year horizon could bite a high yield investor even harder than an investment grade one.
High yield investors are grown-ups. They are paid to be bold, and they usually get it right. But anyone buying a 15 year bond should just pause to remember the directories sector, not to mention technology and telecoms companies that have got into difficulties in the past.
