European high-yield investors are saying the popularity of Europe's largest-ever junk bond says far more about the paucity of European non-telecom junk paper, than about the quality of the E550 million ($440 million) issue by Messer Griesheim (B2/B+). The first quarter saw European junk issuance round out at around $2 billion, against the $30 billion chalked up in the U.S. The investors express concern over the structural debt subordination, which, they say, puts them in a very precarious position in the event of default. There are also questions about information on the explanation of cost-cutting plans, the ability to raise funds via asset sales, and the quality of communication between top executives. Nonetheless, the bond was reportedly oversubscribed by E1.45 billion ($1.28 billion) and trading at E104.5 last week. A high yield syndicate official at Goldman Sachs, which underwrote the deal, declined comment.
"Everyone goes 'I hate it,' and then they buy it," says Toby Nangle, investment manager at Baring Asset Management, who bought some of the paper. Nangle says he is chiefly concerned about which assets the company plans to sell to raise money, when they'll be sold, and how they are valued. He also notes that some $31 million in projected cost savings are designated as "other." "The transparency just isn't there," he says.
Winfrid Schmidt, Messer Griesheim's treasurer, says he is surprised to hear these questions, which he feels were addressed by both himself and the firm's eastern European CEO during a pre-issuance two-week roadshow. He admits that he had trouble answering questions from investors about the firm's U.S. operations, but he feels this is not unusual for companies operating on more than one continent.
Other money managers complain about the structural subordination, in which bondholders are unlikely to recoup any of their investment if the senior bank lenders should take control of the operating company's shares, if certain covenants aren't met and the banks don't like the outlook for the company in the first 179 days. After that time, bondholders will have some claim to remaining assets in the event of a bankruptcy, but they will lose any potential influence over the sale price, according to a major London-based portfolio manager. Nonetheless, he was seriously considering buying bonds as BW went to press because he feels the company is strong and there are few opportunities out there to buy industrial high-yield paper. He feels many investors have no choice but to participate, given the alternatives. "If you don't buy on the principle that you don't like the structure, you're sitting on cash."
Another top London junk buyer is less forgiving. "The buyside is in many ways it's own worst enemy...It finds investment-banker bashing an entertaining game, but rather than hold out for a better-structured deal, a manager will jump in just to stretch for 25 basis points." He confesses that he bought the bond, but thinks it could take a beating if Messer Griesheim's September earnings announcement raises more questions than it answers.