The European high-yield market appears to have propped itself up in bed as it struggles to recover from an extended technology, media and telecom hangover. After a first quarter that saw only six new issues, two deals were snapped up in two days last week, and a third, from Britax Group, which makes autoparts and car seats, was expected to price last Thursday or Friday. Several other deals are said to be on the way.
Having digested the telecom issues in the past, the European market now has pent-up demand and a need for solid industrial credits, says Ed Massaro, head of high-yield capital markets at UBS Warburg. Massaro says UBSW will lead two European industrial transactions this quarter of E150-200 million each, though he declined to name the companies. One of those transactions is for Iceland, a supermarket chain, according to an analyst at another sell-side firm.
Among the pending deals are a £100 million deal for Consort Resources, an energy company, and similar-sized euro deals for Iceland, Galbani, an Italian food company and BBAG, an Austrian brewer. C.P. Ships, a Canadian-based company, is said to be contemplating issuing at least partly in euros this quarter. Bill Hoskins, finance director at Iceland, and Wolfgang Berger-Vogel, a member of the management board at BBAG, did not return calls. Executives at Consort and Galbani could not be reached, though a Lehman Brothers official says the firm will underwrite the deal. Ian Webber, cfo at C.P. Ships, did not return calls, nor did Rich Zogheb, co-head of leveraged finance at Salomon Smith Barney, which is said to be lead underwriter on the deal.
A London-based analyst at Dresdner Kleinwort Wasserstein-Grantchester says the surge in issuance is being driven in part by non-European companies' attraction to the supply/demand imbalance in Europe, which might allow them to get more favorable pricing than they would in the U.S. Last Monday's deal by JohnsonDiversey, a U.S. cleaning products company, priced at par with a 9.625% yield for both its euro and U.S. tranches. But, as of last Wednesday the euro issue was bid at 104.5 versus 104.375 for the U.S. tranche.
One head of leveraged finance says his firm will unveil at least one E200-300 deal by a U.S.-based company within the next two months, and is trying to drum up more of this business. "These are things we're working on. My guys there are hitting the pavement," he says.
Despite the enthusiasm from issuers, the mood overall remains cautious. Investment banks have made severe cuts to their European high-yield operations in recent months, and not one of the origination heads interviewed says he is staffing up again in Europe. Christoper Garman, European high-yield strategist at Merrill Lynch, says one of the struggles for the European market is that it evolved around technology, media and telecom, and so has suffered disproportionately to the U.S. as those sectors have suffered. Regulatory obstacles also persist, and will take time to sort out. "The story has always more about potential than actuality when it comes to new European issuance," says Garman.
Jack Mann, Merrill Lynch's new co-head of leveraged finance, says some of this surge in issuance may be coincidence, as deals are far more event-driven in Europe than in the U.S. While U.S. issuers often use high-yield bonds to refinance bank debt, that practice is still regarded suspiciously by many European issuers. He believes it will evolve over time, however, as the market matures.