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Maturing fast
This year, non-investment-grade debt will be more important
to European fixed-income investors than ever before. A lesson of
last year was that investors have to take Europe's M&A boom
into account. Many eurozone investors lost money in 1999 by trying
to be conservative and sticking to top credits only. Having
discovered that caution doesn't always equal prudence, the buyside
is showing a new surge of interest in lower-rated credits,
including high yield.
"Right now investors across Europe are increasing asset
allocations to high yield by as much as four to five times from
1999 to 2000," says John Wotowicz, European head of high yield at
Morgan Stanley, one of the chief sponsors of the sector in the past
three years. "We are looking forward to a very, very strong 2000
for high-yield issuance," he adds.
A strong 2000 would make a nice change from the mixed
experience of 1999. In September Morgan Stanley pulled a $1.1
billion issue for pay-TV company Kirch. Critics said the credit
story didn't convince. But Kirch is likely to try again soon.
Wotowicz argues that Kirch's autumn failure "tells you more
about the market than the deal. If you looked at the end of August,
the market seemed to be in good shape. Then, through a convergence
of factors including cash outflows from high-yield mutual funds,
interest rate uncertainty and a deterioration of equities, the
market went in the wrong direction. It's very hard when the market
turns around so quickly."
Morgan Stanley bounced back with a deal for cable company NTL
in November. The e810 million deal was the largest to date in a
European currency, and took a step beyond previous practice not
needing any dollar tranches. In the past, market participants
talked of a backstop bid from the US, needed to underpin the often
feeble demand from European (especially continental) investors.
It's not a phrase the market needs any more.
Wotowicz says of the NTL deal: "One hundred and six European
investors bought it, of which about 20 were UK-based. That should
be pleasing for both issuers and investors in Europe."
The biggest remaining headache for many investors is the lack
of sector diversity. Telecoms and cable companies still dominate.
Where will the issuance come from that will finally allow the
construction of diversified high-yield portfolios? One investment
banker is confident: "Private equity deals. LBOs will come to the
market as high-yield transactions. There is so much private-equity
money in Europe right now. A number of deals are going to come to
the market next year, and they are not all in telecoms."
But Wotowicz points to the perennial problem of buyout
specialists: "The biggest challenge for the private equity funds is
to find a sufficient volume of deals to put their money to work."
He argues against the conventional wisdom that European high-yield
must diversify away from telecoms. "If you look at the performance
of industrials versus telecoms, the telecoms issues have vastly
outperformed the industrial sector in secondary trading and in the
number of upgrades."
Marcus Walker
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