NEW YORK-The United States, where high-yield bond issuance originated, for many years has been the hotbed of this important kind of financing, even for telecommunications and other corporate issuers outside its borders.
During the first five months of this year, however, Western Europe burst into blossom like a desert after rain, accounting for nearly 25 percent of all new junk-bond issues sold worldwide.
“I can’t be dramatic enough. The growth in the number of non-U.S. dollar denominated high-yield issues coming out of Europe has been explosive,” said Mark N. Lightcap, managing director of high-yield capital markets for Chase Securities Inc., New York.
“Key drivers include consolidation of industries across borders, the evolution of the European Union and the coming of the euro monetary unit. With the deregulation of European telecommunications, media deals have been coming in droves.”
The “visible forward calendar” of new high-yield bond issues planned by Western European companies as of mid-June totaled US$2.5 billion, a 75-percent increase compared with five years ago, Lightcap said at a recent meeting of the New York Society of Security Analysts.
The companies on this calendar include telecommunications carriers such as Esprit Telecom, Orange plc and Turkcell Iletisim Hizmetieri AS.
“[Esprit and Turkcell] are interesting because, after five to six years of equity investments, they now are cash-flow positive, so it’s a good time for them to tap the market,” he said.
Equally important, willing buyers based in Western Europe are stepping up to the plate as they have not done in the past.
“International leveraged finance requires pools of private equity,” Lightcap said. “Until now, there has been a lack of an indigenous local investor base. It’s been a slow market to develop.”
Traditionally, Western European companies have relied on bank loans or private mezzanine financing available from pension funds “with equity warrants or a participation feature designed to drive yields to the 16-percent level.”
The high-yield bond market in the United States has been propelled in tandem with the explosive growth of mutual funds, in which many individual investors own shares.
“Western Europe is just now developing the infrastructure” through private banking accounts for retail investors, asset-management firms, insurance companies, pension funds and proprietary trading desks of Wall Street trading houses and European banks, Lightcap said.
Furthermore, the small European junk-bond market that has existed has been “a hot money market, a trading market vs. a buy-and-hold market, but it is striving to legitimize itself and build up pools of `investable’ cash.”
In the past, much of the continent’s junk-bond market had been driven by yield plays European investors enjoyed by exploiting fluctuations in the values of the currencies of different European countries. The advent of the euro removes that opportunity.
Furthermore, European investors have experienced disappointing results in Asia and tremendous volatility in Latin America, Lightcap said.
“The trend now is to performance. Investors are credit-focused, as opposed to currency- or arbitrage-focused. They are looking for well-structured leveraged buyouts with well-known sponsors … LBO’s like the speed of the high-yield market.”
It will take time for Western Europe’s financing infrastructure to be fully in place to enable the demand side to catch up with the supply side, Lightcap said.
“For awhile, about 50 percent of these deals will be brought back to the United States to sell. But it is absolutely a phenomenal trend, beyond anyone’s imagination how it will all play out.”
