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Warning for the European bond market

Corporate Finance Magazine Archive

Bankers and investors at a meeting of the High Yield Association have warned that the European bond market could be heading for trouble.

At a roundtable held last week they said that the lack of corporate supply is forcing market participants to discriminate less and less between different credits and different structures. Of particular note were the bond issues earlier in the month by French drinks manufacturer Remy Cointreau, which secured the lowest ever coupon for a European high yield deal, and by German chemicals company Cognis, which was part of a growing trend to give investors no security whatever over the company they are buying into.

The Cognis bond was structured as a Holdco or PIK note, which is issued by a group's holding company and therefore unsecured against any of the company's assets or operating subsidiaries. In the event of a bankruptcy, holders of Holdco notes are paid out last of all bondholders, just before the shareholders. Other examples of recent PIK issuers are Inmarsat, Telenet and World Directories.

Jim Amine, co-head of global leveraged finance at Credit Suisse First Boston, said: “For the right credits, it makes sense. But the problem for the market is that when sponsors see one company selling a Holdco note, then there is a ‘me too' mentality.

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