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High yield bond investors get tough

The high yield market showed welcome signs of recovery last week, and more deals are on the way. But borrowers will need to temper their pricing and structure expectations if they want investors to remain on board, as few will be able to emulate HeidelbergCement’s aggressive stance.

After a record Eu30bn issued in 2009, some Eu20bn of high yield bonds have been raised so far this year in Europe, meaning 2010 is on track to be the best year yet. But the numbers do not tell the whole story.

The market, much like its investment grade brother, has been shut for large periods of the second quarter and high yield investors haven’t been exactly thrilled with some of the deals seen in the past fortnight.

HeidelbergCement caused a big stir with an aggressively priced offering last Tuesday, when the company came out with yield guidance of 7.25% and then closed at what some called a “ridiculous” 6.875%. But despite fierce criticism from investors, Heidelberg’s bond was many times oversubscribed and increased from Eu500m to Eu650m. Ultimately, it got done. It also had a limited impact on subsequent issues later in the week, with car leasing companies Hertz and Europcar able to press ahead with planned deals on Friday.

Whatever the implications for Heidelberg itself when it next brings out a high yield bond, it is heartening that the market is resilient enough to move on from troublesome transactions.

However, issuers do need to be aware of their limitations and be in tune with the high yield bond market’s temperament in order to get their notes priced with minimal difficulty.

Heidelberg was able to get its deal away in the face of heightened, wider volatility because it is a seasoned, well known issuer that is attempting to delever. But if we wind the clocks back to mid-May, Cegedim, the French software company had an altogether much rougher reception in the high yield bond market. Rated BB+, the company was a debut issuer trying to execute an investment grade-style deal without covenants. The deal never made it further than a roadshow, with investors refusing to engage with the proposed structure and the issuer’s lofty ambitions.

Many hope the high yield bond market will play a key role in refinancing company debt in the coming years. In Europe, the wall of LBO maturities will begin to peak in 2013, and high yield bond issues, along with loan refinancings, will have to play a central role in managing that peak.

But high yield investors are already warning they are being much more selective than ever before, especially with primary market deals. They are also adamant they will not be a dumping ground for companies’ refinancing needs.

If there is one lesson to be drawn from Heidelberg’s experience last week, it’s that even seasoned borrowers will need to be realistic when it comes to pricing. B2-rated Europcar printed its Eu250m offering with a 10% yield last Friday — a higher price than it secured in 2006 and 2007, but deemed by many a necessary level for a cyclical company.

For debut issuers hoping to woo investors into helping them refinance their debt burdens, finding the right structure and price will be an altogether more complicated process. It’s time they learned the rules of the game if they want to stand a chance of making headway with their refinancings.

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