European high-yield corporates have historically fulfilled their funding needs primarily through bank loans, with bond issuance making up a far smaller quantum of the funding mix.
However, the days of high-yield bonds routinely ranking subordinate to bank loans have come to an end: senior secured bonds that rank 'pari passu' with loans and thus enjoy the same security have become more and more common in Europe, as the high-yield market steps up to fill the void left by the reduction in bank lending.
The loan market is struggling to handle the refinancing [that is] due in 2012 to 2014, says Arnaud Tresca, head of high-yield capital markets at BNP Paribas. The equity market is not there for those issuers and the bond market will have to step in.
When it comes to voting rights in a distressed situation, though, this equivalence often ends: bondholders can find themselves with no voting rights or a cap on voting rights significantly lower than their overall exposure to the companys debt seems to warrant.
The structure of the senior secured-bond asset class developed without adequate communication with the buyside, said Gavin McKeown, senior high-yield credit analyst at Pioneer Investments at a recent BNP Paribas seminar. The 30% cap on voting rights is not appropriate.
Secured bondholders achieved a measure of success in January as Spanish telecoms company Grupo Corporativo Ono won consent from its bank lenders to grant senior secured bondholders an increased share of voting rights: the cap on voting rights being increased from 30% to 40%. This change will give Ono a better chance of successfully issuing further senior secured bonds thereby giving Ono the money it needs to pay off its loan investors.
Similar issues have arisen at Italian directories provider Seat Pagine Gialle. The company has undertaken a restructuring that would have seen senior secured bondholders have their security package diluted due to new bond issuance, while bank lenders appeared to escape with an unaffected package.
However, a sufficient percentage of Seats senior bondholders were also loan investors with voting rights to block the restructuring. If accord cannot be reached by the end of January, however, the company has said it may be forced to enter special administration.
If bonds had been the instructing class, the situation would have unfolded in a different way, says Richard Nevins, partner at Cadwalader, which is advising on the restructuring. Market pressures have dictated that bonds be given security but this creates pressures in enforcement.
More changes, like those seen at Ono and Seat, might be inevitable if European corporates continue to tap the high-yield market to refinance bank lendings. Senior secured bondholders dont seem inclined to carry on being treated as second-class investors.
Some investors have said they wont look at new transactions where one-for-one voting rights are not in place, observes Martin Reeves, head of high-yield at Legal and General. We will see a couple of groundbreaking deals and then this will become the market norm. But it will only happen when the company is on its knees.
But the wind is not blowing all the bond investors way.
A 900 million deal roadshowed by Polish telecoms company Polkomtel in mid-January does not allow bond investors to see the intercreditor finance agreement and the senior finance facility agreement, something that has been recommended by AFME. There is also no indication that Polkomtel is planning to address the issue of voting rights. The deal is being run by Deutsche Bank, Crédit Agricole, Royal Bank of Scotland and Société Générale.
For more on the outlook for corporate restructuring in Europe for 2012, see February's issue of Euromoney