High yield heartache as LBOs lead on
The investment grade bond market saw raging demand for the one small deal of the week, lining the market up for a strong September, while the high yield market has seen appetite for European credits weaken. Investment grade and leveraged loans alike have settled into the summer lull, though Cinven’s latest acquisition could raise hopes for more LBOs in the final quarter.
Swedish industrial machinery maker Atlas Copco on Tuesday received demand eight times the size required for its €500m 10 year bond, sending a loud signal that September could be a busy time for the investment grade market.
Atlas, rated A2/A/A, priced its €500m 2026 note with a 37bp spread over mid-swaps, after a 13bp tightening from initial price talk of 50bp.
Atlas was the first Nordic corporate deal in the past three months, but its bookrunners said buyers had been broadly European, with French and German investors snapping almost half of the offering.
High yield heartache
In the high yield market, the summer break approaches its end with stronger sales figures though investors are yet to be wooed by European credits, according to a BAML report.
During the first half of 2016, new high yield bond sales were 48% behind 2015’s numbers during the same period. The market since July to mid-August has partially reversed the trend and the lag in issuance in mid-August stands at 37% behind 2015, at €47bn.
This mirrors the stream of new bonds sold in the US high yield market in the past weeks. Issuance in the US has reached $26bn in the past four weeks, $10bn more than in January and February combined, according to Dealogic.
But in Europe, the Bank of America Merrill Lynch survey on credit investors’ attitudes has painted a picture of risk aversion.
Fund managers in investment grade or high yield markets would choose subordinated debt or extend duration before buying bonds with lower ratings than those they already hold in their portfolios, said the survey.
Only 7% of survey respondents said they would be willing to buy pure high yield rated credits with single-B ratings or lower. The percentage of investment grade funds willing to enter the high yield market is just slightly higher, at 9%.
Loans lulled, LBOs lead on
The investment grade loan market has truly hit a summer slump, where even the one juicy M&A deal in the market has slowed its progress.
Melrose is inching to a close on its $1.25bn acquisition loan. The deal was due to have been wrapped up by the end of last week, according to one lead banker, though one lender is still yet to make its commitment. Syndication will now close before the end of next week, the banker said.
While OCI Nitrogen, the subsidiary of fertiliser giant OCI, has signed a €550m credit agreement with 17 banks, 10 of which are new lenders.
The package includes a €250m term loan 'A', a €250m term loan 'B' and a €50m revolving credit facility. The term loan 'A' amortises over five years and the term loan 'B' will be repaid on maturity in 2021.
In the leveraged loan space, Cinven has made the first acquisition from its latest €7bn European-focused fund for US healthcare firm Bioclinica. The deal could spark hope for a run of LBOs this year.
In recent years the final four months of the year have been disproportionately strong for leveraged loan issuance related to LBOs.
Some market participants expect the sponsor community to kickstart another cycle of acquisitions in the coming months, having been predominantly selling companies over the past two years.
Dan Alderson, derivatives editor +44 207 779 7311
Max Bower, leveraged loans reporter +44 207 779 8964
Silas Brown, niche currencies and private placement reporter +44 207 779 8689
Robert Cooke, investment grade loans reporter +44 207 779 8124
Jon Hay, corporate financing editor +44 207 779 7321
Victor Jimenez, high yield reporter +44 207 779 7379
Ross Lancaster, corporate bonds editor +44 207 779 7322
Elly Whittaker, loans editor +44 207 779 8361
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