Ed Clark
With no clear end in sight to the tension between Ukraine and Russia and wider volatility disrupting markets, participants in European high-yield don’t see new issues emerging in the coming days.
“I think the high-yield market will remain pretty quiet given the volatility and uncertainty around Russia and Ukraine,” said one leveraged finance banker. “Things can change quickly but for now this will probably keep people out of the market in the near term.”
Last week marked the first week of no major euro high-yield issuance outside of a holiday period in almost a year, according to IFR data. Transactions were, however, executed in the Nordic market.
Some investors are appreciative of the collapse in supply, pointing out that it could well be helping maintain some level of stability.
“In a sense, not having supply, plus cash balances, which despite outflows are actually pretty healthy, has helped bring a reasonable stability to spreads,” said one fund manager. “But as soon as you get stability the doors will open up.”
In terms of what types of issuer and deal will likely reopen the market, analysts say that it could be from sectors with positive stories to tell or a pressing need to raise funding.
“I would bet on chemicals, capital goods, food, services and debt collectors for different reasons,” said Benjamin Sabahi, head of credit research at Spread Research.
“Chemicals because they generally have a good pricing power when facing higher input costs…capital goods should come up to finance M&A transactions.”
Meanwhile, there is a more positive tone around food and services in light of good revenues and debt collectors may be drawn to the market because there are more non-performing loans for sale and some RCF drawings are likely to need refinancing, added Sabahi.
There are also some maturities next month that could need refinancing. Danish telecoms firm TDC, for example, has a €500m 5% senior due to mature at the start of March.
Whether telecoms firms are well suited to the current environment is up for some debate.
“TMTs typically issue long duration bonds, which have made one of the worst returns so far, so I am not sure they could come back in the coming days,” said Sabahi.
However, BNP Paribas’ head of European credit strategy, Stephen Caprio, has this month put forward the argument that, because of their underperformance, now is an attractive entry point for longer-duration TMT paper
Underpinning this argument is the idea that, while spreads will widen across the curve, long-dated and higher-rated bonds will likely prove more resilient than other parts of the market because, on a relative basis, they are already cheap.
