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High-Yield Drop Highlights How Europe Lags

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A 10-point drop in the high-yield bonds of Esselte Group Holdings, an office supplies manufacturer, is highlighting the need for more disclosure in the European bond markets and shows how transparency on the Continent still lags the U.S., according to investors and bankers.

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A 10-point drop in the high-yield bonds of Esselte Group Holdings, an office supplies manufacturer, is highlighting the need for more disclosure in the European bond markets and shows how transparency on the Continent still lags the U.S., according to investors and bankers. Investor ire mounted last week after the company released an exceptionally bad earnings report--just five months after the company issued a €150 million, seven-year 7.625% bond. The poor earnings fueled expectations the company may breach its bank covenants.

That alone, however, probably would not have contributed to such a steep drop, particularly given late-August technicals. But Esselte did not release information on its bank covenants at the time of the bond sale, which occurred in March when European high-yield new issuance was setting new records.

The lack of transparency makes for uncertainty among bondholders. "It is difficult to assess whether 85 is an attractive level to be involved in the bonds--without knowing what the covenants are, we can't assess the liquidity," said one high-yield fund manager in London. Unlike in the U.S., where bank covenants must be disclosed upon registration of a bond sale with the Securities and Exchange Commission, in Europe such disclosure is the exception rather than the rule.

Overall, the bonds dropped from the high-90s to the low-80s before stabilizing in the mid-80s by the middle of the week.

Esselte is taking note and may review its position on disclosure given the extent of investor dissatisfaction. "We haven't revealed the bank covenants, but are considering it," said Chris Curran, spokesman for Esselte, adding the company would take such action only under advisement from its bankers at Credit Suisse First Boston. Guy Douglas, head of high-yield capital markets at CSFB in London, was on vacation and did not return calls.

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