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Capital Markets

High-yield bonds: Returns are there for a reason

PIK deal shocks market; Market risks overshoot

The strength of the rally in high yield was underscored by two key transactions at the end of last year. First, Liberty Global financed its recent €3.5 billion buyout of German cable firm Unitymedia entirely in the high-yield bond market. And just before Christmas Wind Telecomunicazioni priced an audacious €750 million PIK note – the largest since 2007. But the reception with which both deals were greeted has rung alarm bells among those in the market worried about overshoot.

Liberty Global’s €2.66 billion senior secured bonds, issued in euros and dollars, attracted €10 billion of orders despite some scepticism beforehand that the deal was too ambitious at this stage in the market’s recovery. But its reception proves that the incredible rally the high-yield market enjoyed in 2009 looks set to continue into 2010.

By comparison
The Unitymedia deal makes an interesting comparison with another large European cable company buyout – the Essent Kabelcom deal in September 2006 that financed the Dutch firm’s purchase by Warburg Pincus and Cinven.

In that deal €4.35 billion of debt was raised in the loan market – senior, second-lien and mezzanine (the €1 billion mezz piece being the largest such tranche in Europe).

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