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HY boom is letting issuers break taboos

By Stefanie Linhardt
15 Apr 2014

High yield issuers just keep on flexing their muscles, showing investors where the power in the market lies. The latest totem to fall to the extreme supply-demand imbalance is call protection, now down to a new low of 1.5 years.

The high yield market’s strong imbalance between supply and demand (European high yield has seen net inflows of over €13bn since the beginning of 2013) is helping high yield issuers enjoy record low pricing and the highest ever oversubscription levels on deals. But not content with flying-off-the-shelf executions, issuers are also bringing transactions with higher leverage multiples, concessions on documentation, and on the term structure of the debt.

The latest example is  the call structure on high yield bonds, which has hit a new low for fixed rate bonds in the case of the deals for French glass packaging business SGD Group and optician Alain Afflelou.

Both companies, owned by Oaktree Capital Management and Lion Capital respectively, are seeking to sell five year bonds, which will be callable after one and a half years.

In a different market environment, investors would be screaming and asking for yield concessions. In today’s market, no one is complaining, according to the leads.

Even more so, SGD Group does not even seem to be paying up for the exceptionally short call. Price guidance in the 5.75% to 6% area for the B rated bond by Standard & Poor’s is sharply below the 7% where Kaufman & Broad sold its five and a half year non-call two bond with the same rating by S&P was sold in March.

The shorter the call protection, the earlier and easier it is to refinance a bond for a portfolio business, and the easier it is for a sponsor to sell it. For investors in high yield, however, this means: the prospective life-time of their investment is shorter.

Traditionally, the non-call period on fixed rate bonds is half its lifetime, leaving an eight year bond with non-call four protection or a five year with non-call three or two and a half years.

Floating rate notes are a different kettle of fish: With call protection of one year, FRNs are private equity firms’ darlings. This has led to a boost in FRN issuance since 2013 but companies want to bring this to the fixed rate market too.

This week could be a turning point though, as the market technicals might finally swing back to a better balance between investor appetite and new supply. Italian telco Wind sold €3.75bn equivalent in one of Europe’s largest deals ever last week and the largest ever transaction for Numericable and Altice, worth a whopping €10bn equivalent, is waiting in the wings.

However outrageous a 1.5 year call may be, SGD is wise to flex its muscles while it still can.

By Stefanie Linhardt
15 Apr 2014