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European high yield: If you can’t stand the heat…

Some investors in European high yield are getting angry about deal terms but greed means little will change.

The high-yield market in Europe is up nearly 50% this year and shows no signs of slowing down. The top-10 bookrunners underwrote $70 billion of business in the year to March 31 2011 compared with $51 billion for the same period last year. In any market operating at this kind of pace tempers will inevitably start to fray. And they have.

Conditions in the leveraged finance market are described as "hyper, hyper competitive" by one banker. And this is pushing both bank and bond buyers further along the risk spectrum than some of them really want to go. A group of more than 30 high-yield and leveraged-loan investors vented their frustration in March by writing to underwriters with a list of complaints about how the market operates. "Some of the basic premises that have underpinned senior-secured bond issuance to date need to be revisited," they said. "Current structures have evolved without adequate buy-side involvement and some of the mechanisms are inappropriate for senior-secured instruments." They go on to demand that senior facilities be fully disclosed – as they are in the US – and for lenders and bondholders to have equal rights in enforcement.

Issues such as these have been chewed over in the market for some time, ever since the trend for corporates to refinance senior loans in the bond markets began.

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