Leverage in European high-yield offerings is expected to rise to levels not seen since the heydays of the 1980s before the end of the year, and this is causing even normally bullish sell-siders to express concern the white-hot market may be in for a cold shower.
The next deal in the pipeline, VNU World Directories, could be as much as eight times levered, though the precise multiple will depend on the deal structure. This outstrips by up to a full multiple the leverage of German sanitary fittings company Grohe, a deal which raised eyebrows when it came to market after the summer lull (BW, 9/13). "How many more crazily levered, poorly structured deals that still trade up on the break can get priced?" asked one trader.
The deal could include a payment-in-kind note, which would up the leverage from seven to eight times. "From an economics perspective, there is little difference between doing a [payment-in-kind] note upfront and doing a dividend deal later on. The difference between the two lies in the timing," said one London-based high-yield analyst. There have as yet been no euro-denominated dividend deals, but investor appetite for the PIK note on VNU might pave the way for the first one.
The supply-demand imbalance in the high-yield market could be righted as new deals flood the market in the New Year. "Circumstances are ideal for issuers right now, but it takes time to put a deal together--you can be sure a lot of deals are being worked on right now across the street, which will all be competing for investor attention in the spring," said a sell-sider. Furthermore, the golden days for issuers might soon be threatened by rising default rates and further interest rate hikes. Both are near their all-time lows, which explains why leverage is near all-time highs. "It's just a matter of time before the market gets caught out by rising inflation," commented a London-based analyst. "The first time [the Consumer Price Index in the U.S.] comes in above expectation will really throw a wrench in the works," he added.
VNU is in the pre-marketing phase, and Credit Suisse First Boston, Bank of America, Goldman Sachs and J.P. Morgan are underwriting the deal. Bankers involved declined comment.
