European high-yield issuers are pushing the envelope on new offerings, but investors are not biting. The structures of three junk sales were changed last week shortly before they were priced to accommodate investors who balked at weaker terms. New deals have been increasingly featuring a higher percentage of bonds that the issuer can claw-back, allowing them to redeem 40% of the bonds outstanding at par plus the coupon after three years. This is up from a more traditional 30-35% level.
“Along with weak structural features that limit downside protection, increasing the claw-back on a deal means that the upside features are being compromised,” said Andre Mazzella, portfolio manager at Morley Fund Management in London.
But investors are not swallowing the increase. After a roughly six-week period during which claw-backs had climbed to 40%, weaker credit markets helped investors buck the trend and force issuers back to 35%. Filtration products manufacturer Polypore’s $400 million equivalent offering (via J.P. Morgan Securities) and Spanish unlisted cable company ONO’s E350 million offering (by BNP Paribas and Morgan Stanley) were both altered to a 35% claw-back. German chemicals company Cognis’ E745 million offering, led by J.P. Morgan and Goldman Sachs, was also changed late in the marketing period.
“Investors viewed the 40% claw-back as too aggressive, so it was changed to achieve better pricing,” said a syndicate official at J.P. Morgan, referring to the Polypore sale.
The claw-back climb began in late March with a 40% level on a E275 million offering of 8 1/4% notes of ’14 by airplane engine repair and overhaul provider MTU, managed by Credit Suisse First Boston and J.P. Morgan.
