"If we can't come up with a structure, the future of high yield in Europe is under threat." The concern of Clifford Chance securities lawyer John Connolly is justified. There were just 14 high-yield deals in Europe in the first four months of this year, compared with 134 in the US, according to investment banking research firm Dealogic. European high yield isn't working, and only the region's lawyers can rescue it.
An investor in junk bonds in the US can expect to get about a third of the money invested back from a borrower that defaults. But differences in the way deals are structured in Europe mean investors are likely to lose as much as nine-tenths of their initial outlay. With default levels for 2002 double those of the previous 17 years put together, a group of institutional buyers, including the asset management arms of Aberdeen, AXA and ING, have even written to the industry saying that they will avoid high-yield bonds unless these are structured more favourably.
As high-yield bond deals stand in Europe, a troubled company's bankers can in theory sell its assets and take back their money without so much as a phone call to bondholders.