Europe's high-yield issuers to seek U.S. solace
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Europe's high-yield issuers to seek U.S. solace   | 16.12.2011.

LONDON, Dec 16 (IFR) - Europe's most indebted companies are likely to turn to the U.S. high-yield bond market in record numbers next year as fears intensify that the ongoing eurozone crisis will stifle a recovery in gridlocked European leveraged finance markets.
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As many as 20 issuers are gearing up to refinance in the resilient U.S. bond market, whose doors have remained open for business throughout the eurozone sovereign turmoil that has shut down its maturing, but still much smaller, European counterpart for the best part of six months.

With around EUR250bn of leveraged loans maturing over the next five years, according to S&P, corporates cannot risk waiting for a possible reopening in Europe when there is cash for the taking now across the Atlantic.

And banks, who are desperate to lighten their balance sheets, are also taking a more global approach to their capital markets business. They are even using the deep U.S. market liquidity to fund leveraged buyouts for both certainty of finance and lower borrowing costs.

Private equity firm Apollo, which won a bidding battle for Belgian chemicals company Taminco this week, will finance the EUR1.1bn buyout with around EUR800m-equivalent of debt solely in dollars.

"A number of corporates are exploring the potential for a transaction in US dollars at the beginning of next year," said Dominic Ashcroft, executive director, capital markets syndicate at Goldman Sachs. "As long as they are willing to deal with all the paperwork, dollars can be an option."

Henrik Johnsson, head of European high yield capital markets at Deutsche Bank, said the U.S. rush could kick off in January before reporting numbers go stale in mid-February.

"If there is going to be a key theme next year, it will be about accessing the U.S. dollar market in loans and bonds, and then opportunistically in Europe where the market may only be open for limited periods of time over the next six months," he said.

The trend has already gathered pace this year with 32 European issuers raising USD20.4bn worth of dollar denominated high-yield bonds, up from USD16.4bn from 23 issuers in 2010, Thomson Reuters data shows.

This year, a wide range of European companies have sold dollar-denominated high-yield bonds. They include issuers based in eurozone peripheral countries, such as Spanish cable company ONO, luxury car maker Jaguar Land Rover, carbon maker Kinove and drinks group Pernod Ricard.

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"Many European companies for the first time in years are seriously considering a big U.S. dollar tranche financing," said Wayne Rapozo, a finance and securities partner at law firm Dechert.

The benefits will be skewed to companies that have dollar revenue and cost exposure in their businesses, while those without that dynamic need to factor in the costs and risks associated with a euro-dollar hedging strategy.

Corporate treasurers are also wary about becoming embroiled in a potential funding bottleneck especially with debt-stricken eurozone sovereigns competing for cash in illiquid markets at not dissimilar yields. Italy, whose 10-year debt has bounced around 7% of late, has EUR440bn alone to refinance next year.

They are also well aware that the scarcity of liquidity is only going to get worse in Europe, which is pushing them to act fast. Banks are struggling to meet regulatory capital requirements and the potential demise of collateralised loan obligations, another vital liquidity pool, is expected to coincide with the 2014-2015 peak in leveraged loan maturities.

The standstill in high-yield bond markets, seen as the only alternative for leveraged companies to raise cash away from bank loans, is showing little sign of improving. Of the EUR38.6bn non-dollar denominated supply this year, EUR34.5bn was raised in the first seven months of the year, according to Thomson Reuters data.


The sharp sell-off in high-yield bonds means that many leveraged companies are priced out of capital markets or are considered too risky by investors -- and the dollar market will not be able to come to the rescue of every company.

"You don't have to be a brand name in the U.S., but you do have to be a certain size. If a company has at least 150 million euros of EBITDA and the business has some global element to it, then it would almost definitely have access to the dollar market," said Johnsson.

The pain threshold for companies as far as interest costs are concerned is in the range of 13-14%, several high-yield syndicate bankers said, adding that lenders faced tough decisions on so-called amend and extend agreements.

"The real question is how hard are banks going to be on corporates that they lend to in forcing them into the high-yield market to refinance at levels of 10% plus for single B rated credits," one high-yield syndicate banker said. Banks are caught between a rock and a hard place.

To preserve capital, they must cut lending, but if they pull credit lines to struggling corporates, the losses are potentially a lot higher. That means a huge spike in defaults is unlikely next year, as banks renegotiate maturity and margin terms on existing debt instead.

Rating agency Moody's is forecasting the global speculative-grade default rate will rise only moderately to 2.7% by the end of 2012 from an expected end-2011 rate of 1.7%.

In considering the amend and extend route where leveraged companies are facing covenant headroom problems, Rapozo said banks will want to be practical.

"Banks will not want to bring down the house of cards and risk losing the value of a business as a going concern just because of a bad combination of high leverage and a volatile bond market," he said.

Deutsche Bank, Royal Bank of Scotland and UBS agreed to extend Northern Irish utility Viridian's loan for another year this month, but only days before the loan matured, and only after they exhausted marketing of a high-yield bond, which was once tipped to come before the summer volatility.

On the upside, there is plenty of cash -- despite moderate outflows -- and several new funds have burst onto the scene. If stability returns, investors say that value is compelling and spreads -- at around 800bp -- are more than adequately compensating for default risk.

In addition, over the past three years, funds invested in European high yield bonds yielded a 59.68% return, Lipper data shows. Although that was mostly generated in 2009, it surpassed returns in both government bond and investment-grade corporate funds. (Reporting By Natalie Harrison, editing by Alex Chambers)

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