| High-yield deals expected in the European market in first half of 1999 |
| Issuer |
Country |
Sector |
Amount |
Lead manager |
| CompleTel |
France |
Telecoms |
$300 million |
Salomon Smith Barney |
| Willis Corroon |
UK |
Insurance |
$550 million |
Chase Manhattan |
| Coral |
UK |
Betting |
£250 million |
Lehman Bros |
| Cable Europa |
Spain |
Telecoms |
- |
Salomon Smith Barney |
| Jazztel |
Spain |
Telecoms |
$150-$200 million |
Merrill Lynch |
| Leica Geosystems |
Germany |
Optical equipment |
Dm180 million |
Merrill Lynch |
| |
|
|
|
|
| Virgin |
UK |
Media |
£200 million |
- |
| Kappa |
Netherlands |
Packaging |
- |
Barclays Capital |
| Source: Lead managers |
It was a cruel blow. Although almost all capital markets were hit in the aftermath of the Russian crisis, the European high-yield debt market was struck down in its infancy. Twelve months ago excitement about the take-off of the corporate debt market in Europe was reaching fever pitch, as banks hurriedly imported credit analysts and high-yield originators from the US and set about ridding the asset class of its junk-bond stigma. The secondary market began to edge towards liquidity, and new issues were increasing in frequency, size and variety.
But soon after the Colt Telecom and Remy Cointreau deals at the end of July 1998, the market felt the effects of the Russian crisis. "The market was effectively shut for a period of time and spreads in the aftermarket widened considerably," says Robin Doumar, co-head of European high yield at Goldman Sachs. Secondary trading and new issues were wiped out, and the market's earlier enthusiasm looked rather premature. "The market was closed to anything that wasn't red, white and blue - pure American - or anything complex," agrees Anthony May, global head of high yield at Paribas.
Time to rebuild
This year presents an opportunity for the high-yield market to rebuild itself. The first sign of life after the crisis was the dollar deal from cable company NTL at the end of October. Although this was not in a European currency and was sold to few European investors, it helped rebuild European investor confidence and refocused attention on the attractions of the sector.
John Wotowicz, European head of high yield at Morgan Stanley, one of the bookrunners for the NTL issue, explains that the deal was driven by investors' desire to come back to the market. "Investors have retrenched from emerging markets and are viewing high yield as a safer alternative." He adds: "There was $3.5 billion to $4 billion of cash going into high-yield mutual funds a month. Mutual funds have to be as fully invested as possible to maximize returns, and the secondary market was depressed at this point." He goes on to explain: "After the market was closed for three months there was pressure on investors to buy new bonds." This conforms to the "wall of money" theory that cash was building up and had to be spent sooner or later, despite unfavourable market conditions.
Meanwhile, the more resilient US secondary market was starting to pick up, stimulated by Federal Reserve interest-rate cuts. NTL was swiftly followed by a $350 million deal from Telewest Communications, led by Donaldson Lufkin & Jenrette (DLJ). "Everyone had just come through three months of trauma but the first couple of deals performed well," says Jonathan Ezrow, head of European high-yield capital markets at DLJ. "Issuers did have to pay a premium to get the deal done, but it kept the momentum of the market going."
A true sign of European market recovery was the success of the deal by Belgian telecoms company Hermes, which was launched just before Christmas and included an €85 million ($98.6 million) tranche. This was the first non-dollar deal since July and the first to be sold mainly to European investors. "It was very good to see that they were able to get a euro tranche executed," says Youssef Khlat, head of European debt syndicate group at BT Alex Brown.
These deals have helped the revival of the European high-yield market, but it remains far from healthy. Banks, issuers and investors are holding their breath until they see conclusive evidence that the market is becoming liquid and high yield is out of the woods.
High-yield market players seem to be split on whether remaining problems lie with the supply of deals or demand from investors. Many are confident of investor interest, thanks to the strength of trading on the secondary market, but are concerned about a lack of new issues. "Everybody has got cash to put into play but there has been a slow down on the supply side," says Jonathan Turnbull, head of European high-yield capital markets at Salomon Smith Barney. "The market's crisis decreased LBO activity and so slowed down high yield." The supply of new issues is more closely linked to LBO activity in the European market than it is in the US.
Wotowicz agrees that the main barrier for the market is a lack of supply. "It takes a while for the deal pipeline to reconstruct itself, especially on the LBO side. Deals have been put on hold and leveraged financings were structured without high yield," he says. It will take some time for the borrowers who took refuge in mezzanine and bank financing during the market depression to return. "But they will come back," asserts Khlat. "The merits of issuing high-yield debt are still persuasive, the arguments are still there."
Carolyn Aitchison, head of European high yield sales and trading at DLJ agrees that the problem is the quality of the supply of issues: "The names that have traded down the most were the ones that had credit issues to resolve," she says. "Instead of start-up telecom companies the market wants more double-B industrial credits with big market share and a recognizable product. We are expecting some of these issues to come soon, but not as many as the market would like to see."
Make way for the Mittelstandt
The advent of Emu and its effect of speeding up corporate restructuring is likely to provide a larger pool of potential issuers, however, especially among mid-cap companies in large markets such as Germany.
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