PHOTO
* Standards continue to slip in European high-yield
* Portability clauses loosen further
* Buyers strike unlikely in hot market
By Robert Smith
LONDON, Aug 11 (IFR) - The clamour for European high-yield paper is once again undermining standards and safeguards, which market participants warn has eroded bondholders' protection more than ever before.
Single B rated companies raised over 3.2bn-equivalent in July, capitalising on junk debt's recovery after an initial sell-off in the wake of the UK's Brexit vote.
Most of these deals priced at tighter yields than many predicted while also driving hard on covenants and terms with little investor pushback, chipping away at the checks and balances traditionally required to raise junk-rated debt.
"It's just a shame the 'big guys' in Europe can't find a way to grow a pair and stand up to this," said one high-yield fund manager.
"If no one has any backbone because they are scared they aren't going to get an allocation, then stuff like this is going to keep happening."
Italy's Gamenet and the UK's Mydentist both slashed bondholders' call protection on their deals, limiting the potential upside for investors in the process. The former is only the second company this year to sell a five-year fixed-rate bond with just a 1.5-year non-call period.
Six deals sold in July also included portability language, a controversial feature allowing companies to waive change-of-control clauses if a leverage test is met. This overrides high-yield investors' traditional right to sell bonds back to a company at a 101 cash price if the business changes hands.
Mydentist pushed the feature even further, however, becoming the first issuer to include a portability test determined on the date of an acquisition agreement, not the date the company actually changes control.
urn:newsml:reuters.com:*:nL8N1A814E
NO PROGRESS
But even when investors do push back against aggressive terms, the balance of power is still weighted heavily in the issuers' favour.
Mydentist and Italy's Sisal issued bonds in July with net debt-based portability clauses, which is problematic, as a buyer could inject cash into a business to meet the test but then take this money out using a dividend shortly afterwards.
Credit research firm Covenant Review noted that leads added new provisions to Sisal's portability clause during marketing to assuage investors' concerns around this. But the tweak to the bond's restricted payments basket concerned cash contributions used "to repay indebtedness", even though an acquirer would not actually have to pay down debt to satisfy the net leverage test.
"This may be one of the ways banks try to make investors feel comfortable with a net debt test for portability, even though it doesn't address any of the concerns behind it," Sabrina Fox, co-head of European research at Covenant Review, told IFR.
"We do not call this progress at all."
One high-yield syndicate banker agreed that many portability clauses had become complex and prone to abuse.
"When they say 'it's subject to this leverage but not including these baskets', it's like the health warning at the end of an advert for prescription drugs in the US," he said.
Peter Aspbury, a portfolio manager at JP Morgan Asset Management, said the terms on many recent deals raised the question of who really represents the investor.
"The underwriters' counsel is supposed to do that job, but the terms that we see suggest the role has become a mere formality," he said.
"Of course, it's a complete impracticality to have a diverse multitude of potential investors agree terms with the issuer beforehand, but that impracticality is precisely why the underwriters and their counsel should do more to ensure that investors' interests are better served."
BUYERS STRIKE
Scott Josefsberg, an analyst at Covenant Review, said that even when covenants are irrational, if they are accepted once, they take a foothold in the market.
"This data-driven, precedent-based approach is much more prevalent in Europe than the US," he said.
The US high-yield market has more forcefully resisted aggressive deviations, with very few issuers cutting back non-call periods, and portability remaining taboo.
The banker said there were structural reasons why there was "a lot more discipline" in the US.
"Part of it is because the US market is really driven by less than 10 very big accounts, whereas Europe has a much more active middle tier that can take stuff down without the big guys," he said.
The last time the European high-yield market saw a significant "buyers strike" was in 2002-2003. High-yield bonds were at the time issued at structurally subordinated holding companies, but investors successfully pushed for change after this resulted in low recoveries during the telecoms bust.
"In a low-default environment, people don't lose much sleep about the implications of accepting these terms, but if you've lived through a severe default cycle, then you appreciate how loose terms can hurt recoveries," said Aspbury.
"Unfortunately, it may very well take a repeat of 2000 and 2001 for investors to realise what they've been signing away."
(Reporting by Robert Smith, Editing by Helene Durand and Philip Wright) ((robertp.smith@thomsonreuters.com; +44 207 542 9514; Reuters Messaging: robertp.smith.thomsonreuters.com@reuters.net))
* Portability clauses loosen further
* Buyers strike unlikely in hot market
By Robert Smith
LONDON, Aug 11 (IFR) - The clamour for European high-yield paper is once again undermining standards and safeguards, which market participants warn has eroded bondholders' protection more than ever before.
Single B rated companies raised over 3.2bn-equivalent in July, capitalising on junk debt's recovery after an initial sell-off in the wake of the UK's Brexit vote.
Most of these deals priced at tighter yields than many predicted while also driving hard on covenants and terms with little investor pushback, chipping away at the checks and balances traditionally required to raise junk-rated debt.
"It's just a shame the 'big guys' in Europe can't find a way to grow a pair and stand up to this," said one high-yield fund manager.
"If no one has any backbone because they are scared they aren't going to get an allocation, then stuff like this is going to keep happening."
Italy's Gamenet and the UK's Mydentist both slashed bondholders' call protection on their deals, limiting the potential upside for investors in the process. The former is only the second company this year to sell a five-year fixed-rate bond with just a 1.5-year non-call period.
Six deals sold in July also included portability language, a controversial feature allowing companies to waive change-of-control clauses if a leverage test is met. This overrides high-yield investors' traditional right to sell bonds back to a company at a 101 cash price if the business changes hands.
Mydentist pushed the feature even further, however, becoming the first issuer to include a portability test determined on the date of an acquisition agreement, not the date the company actually changes control.
NO PROGRESS
But even when investors do push back against aggressive terms, the balance of power is still weighted heavily in the issuers' favour.
Mydentist and Italy's Sisal issued bonds in July with net debt-based portability clauses, which is problematic, as a buyer could inject cash into a business to meet the test but then take this money out using a dividend shortly afterwards.
Credit research firm Covenant Review noted that leads added new provisions to Sisal's portability clause during marketing to assuage investors' concerns around this. But the tweak to the bond's restricted payments basket concerned cash contributions used "to repay indebtedness", even though an acquirer would not actually have to pay down debt to satisfy the net leverage test.
"This may be one of the ways banks try to make investors feel comfortable with a net debt test for portability, even though it doesn't address any of the concerns behind it," Sabrina Fox, co-head of European research at Covenant Review, told IFR.
"We do not call this progress at all."
One high-yield syndicate banker agreed that many portability clauses had become complex and prone to abuse.
"When they say 'it's subject to this leverage but not including these baskets', it's like the health warning at the end of an advert for prescription drugs in the US," he said.
Peter Aspbury, a portfolio manager at JP Morgan Asset Management, said the terms on many recent deals raised the question of who really represents the investor.
"The underwriters' counsel is supposed to do that job, but the terms that we see suggest the role has become a mere formality," he said.
"Of course, it's a complete impracticality to have a diverse multitude of potential investors agree terms with the issuer beforehand, but that impracticality is precisely why the underwriters and their counsel should do more to ensure that investors' interests are better served."
BUYERS STRIKE
Scott Josefsberg, an analyst at Covenant Review, said that even when covenants are irrational, if they are accepted once, they take a foothold in the market.
"This data-driven, precedent-based approach is much more prevalent in Europe than the US," he said.
The US high-yield market has more forcefully resisted aggressive deviations, with very few issuers cutting back non-call periods, and portability remaining taboo.
The banker said there were structural reasons why there was "a lot more discipline" in the US.
"Part of it is because the US market is really driven by less than 10 very big accounts, whereas Europe has a much more active middle tier that can take stuff down without the big guys," he said.
The last time the European high-yield market saw a significant "buyers strike" was in 2002-2003. High-yield bonds were at the time issued at structurally subordinated holding companies, but investors successfully pushed for change after this resulted in low recoveries during the telecoms bust.
"In a low-default environment, people don't lose much sleep about the implications of accepting these terms, but if you've lived through a severe default cycle, then you appreciate how loose terms can hurt recoveries," said Aspbury.
"Unfortunately, it may very well take a repeat of 2000 and 2001 for investors to realise what they've been signing away."
(Reporting by Robert Smith, Editing by Helene Durand and Philip Wright) ((robertp.smith@thomsonreuters.com; +44 207 542 9514; Reuters Messaging: robertp.smith.thomsonreuters.com@reuters.net))
