The following is a press release from Fitch Ratings:
Fitch Ratings-London/Frankfurt-06 February 2012: Fitch Ratings says that high demand for new issues among US high yield investors, combined with near-term relief in Eurozone financial system stress, is driving a strong start to the European High Yield (EHY) market.
“As of 3 February 2012, approximately EUR10.7bn of issuance from European speculative-grade corporates in predominantly US dollar tranches already signals the momentum for a robust Q1 2012. However, the lack of appetite from European based investors, as reflected in the material spread differential between US dollar denominated and Euro denominated market benchmarks, and a recent shift towards higher risk new issuers taking on USD liabilities with EUR denominated cash flows highlights the potential for more volatility,” says Matthias Volkmer, Director in Fitch’s European Leveraged Finance Group, Frankfurt.
New issuance this year reflects investor preference for stable credit stories with BB rating profiles from favoured sectors and among issuers with existing investor bases, notably in the US, as well issuance in the form of secured notes. In the absence of cost-effective demand in sufficient volume from European investors, BB rated European issues like Fresenius as well as Single-B issues with secured and unsecured instruments like Ardagh and Ceva, with yields ranging between 5.5% and 13%, have taken advantage of more favourable funding conditions this year in the US market.
The successful placement of new issues from single-B category issuers, including an upsized issue of USD1bn 7-year non-call-3 senior secured notes issue by Spanish cable operator Ono; USD325m 7-year non-call-3 senior secured notes by Danish Oilfield service provider Welltec and USD945m aggregate notes by Netherlands-based supply-chain-management firm Ceva Logistics; highlight the gap in risk appetite as well as pricing and volume conditions between the US and European investor bases. All three issues reportedly traded at material discounts after issuance, reflecting limits to demand and the determination of arrangers and issuers to access all available volumes at higher costs (including currency basis swaps) than their maturing legacy debt.
Nonetheless, the pipeline of potential issuers for the coming weeks amounts to equivalent EUR2.65bn and includes CHF575m notes by the Apax LBO of telecom Orange Switzerland, USD500m by Italy-based PET resin producer Mossi & Ghisolfi and USD850m senior secured 7-year non-call-3 notes by UK chemical business Ineos to refinance 2013 loan maturities.
“It is perfectly understandable that alternative sources of capital will fill the void for Europe’s higher quality speculative-grade borrowers, however the move towards USD funding highlights differences in liquidity conditions, rather than differences in risk appetite between US and European high yield investors,” added Edward Eyerman, Managing Director and Head of Fitch’s European Leveraged Finance Group.
Specifically, the USHY market consists of over USD1trillion in outstanding volumes, with low default rates and average coupons of 8% translating into USD$80bn in coupon flows alone to support new issuance. With US refinancing activity largely exhausted and a dearth of M&A new issue, US investors are instead targeting European issuers willing to pay a premium over tighter USHY secondary market levels. EHY, in contrast, consists of approximately EUR250bn in outstanding speculative-grade corporate volumes, and relies on retail flows to a much greater degree than the institutionally supported USHY market. Consequently, European investors suffer greater volatility as a result of inflows and outflows driven by Eurozone risk aversion and secondary market spreads for EUR denominated issues remain materially higher than US benchmarks.
The greater depth and liquidity in the US market also allows US investors to accept higher incremental risk from European issues than their European counterparts given the lower impact of single-issuer losses in US portfolios. As a result, greater concentration risk in European portfolios will continue to limit volumes.
Contact:
Matthias Volkmer
– Director
– +49 69 7680 76252
– Fitch Ratings
– Taunusanlage 17
– 60325 Frankfurt
Edward Eyerman
– Managing Director
– +44 20 3530 1359
Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com; Christian Giesen, Frankfurt am Main, Tel: + 49 (0) 69 7680 762 32, Email: christian.giesen@fitchratings.com.
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