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High yield lite” takes hold in European bond markets

London, Tuesday, 9 June 2015: Debtwire hosts its inaugural European High-Yield Forum today in partnership with its sister company Xtract Research, a covenant analysis provider, and Proskauer, a global law firm and lead strategic partner. Rothschild and Freshfields are strategic partners to the event. The event will examine the nature of the European debt markets with issuers, banks, private equity funds and institutional investors outline some of the main trends in leveraged finance.

As the financing product continues to evolve in 2015, European Head of Research, Christine Tadros will reveal recent Xtract Research analysis of European leveraged loans.
James Slessenger, European Managing Director at Xtract Research, will chair a panel on high yield bond covenants, featuring speakers from RBS, BC Partners and Freshfields. Simone Bono, Partner at Freshfields, comments: “We’ve seen some interesting developments in the leveraged markets recently, with increased convergence between leveraged loans and high yield bonds and increased covenant flexibility across instruments and markets; for example, around call protection and portability. This is an exciting time for the European high yield bond market and we will continue to see increased influence between different leveraged products.”

Slessenger says: “The increase in volume of “high yield lite” bonds continues this year. This trend refers to sub-investment grade issuers somewhere in the BB spectrum issuing bonds that look far more like investment grade deals than typical high yield bonds and thus omit some of the standard high yield covenant protections for investors. One has to ask; is BB- the new BBB? In conventional high yield issues, private equity sponsors’ flexibilities continue to percolate into the covenants of straight corporate issuers’ – including debt issuers’ – making them more “market.”

Speaking in the downsizing session alongside Credit Suisse, Citi and Standard Life, Stephen Llewellyn, Head of Debt Capital Markets Advisory at Rothschild, says: “We have seen an increasing demand from clients looking to access the high yield bond markets for the first time, including those at the smaller end of the spectrum.”

Many of the trends highlighted in Proskauer’s recent 2015 Global High-Yield Bond Study will also come up for discussion. The report provides an in-depth analysis of deal terms and trends. Using data from Proskauer’s extensive proprietary database of high-yield deals, the study covers 1,236 deals closed globally in 2011–2014. Deals are categorized by geography, deal size, industry, credit rating and whether they are backed by private equity sponsors.

Key takeaways from Proskauer’s study include:

It’s good to have a sponsor. High-yield issuers backed by private equity sponsors continue to benefit from greater flexibility in deal terms than non-sponsor-backed issuers.
Issuers’ increased flexibility. Certain deal terms that were once perceived as aggressive or unusual are now more common. An example is an issuer’s ability to make unlimited restricted payments if the issuer meets a specified leverage ratio.
Rise of European high-yield. High-yield has become a mainstream asset class in Europe/Middle East/Africa (EMEA). Issuance is approaching U.S. levels after years of relative obscurity, and there is a trend toward more creativity and flexibility in EMEA deals compared to the U.S.
Shift toward private-for-life. Most high-yield deals have historically been private offerings under Rule 144A, but came with registration rights obligating the issuer to exchange the private bonds for public bonds typically within the first year after the bonds were issued
Some weaker credits get better terms. In 2014, as in preceding years, some weaker credits (rated CCC and below) negotiated terms that were more issuer-friendly than did higher-rated credits (rated B or better)
Industry matters. The incidence of certain terms and flexibilities is often driven more by an issuer’s industry than its rating or credit quality. For example, whereas most 2014 deals (83%) had a ratio debt test based on a fixed charge coverage ratio, 59% of technology, media & telecom (TMT) deals had a test based on a leverage ratio.

To view the full copy of the Proskauer Global High-Yield Bond Study, please click here.