Credit slide in European high-yield yet to materialise -S&P

Thu Feb 14, 2013 12:00am GMT

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LONDON, Feb 14 (IFR) - Credit quality in Europe's high-yield bond market remains strong despite increasing risk appetite from investors that has helped underpin a solid start to the year for primary issuance, ratings agency S&P said in a report published on Thursday.

Speculative-grade borrowers issued almost EUR5bn in bonds in January, which is just shy of the record EUR5.6bn issued in January 2010, and a five-fold increase on the EUR1bn sold in January 2011 when the high-yield market was frozen to all but the highest rated corporates, according to S&P.

S&P said companies have cushioned an 8% contraction in operating cash over the past 12 months, by raising cash in the debt capital markets. Operating cash contracted by 9% in 2008.

"Since September 2012, and particularly in January of this year, we've observed a significant wave of debt issuance in Europe being matched by investor appetite," S&P said.

"However, the evidence does not yet point to an overheated market in Europe. Companies' use of the debt capital markets remains conservative, with no substantial use of debt-funded, shareholder friendly financial policies."

Orange Switzerland, owned by private equity group Apax, was one of the minority of issuers last year that used bond proceeds to pay itself a dividend. But even in that situation, leverage was only increased to the same level at which the company was first acquired.

S&P highlighted that speculative-grade issuers have benefited from a halving in funding costs over the last twelve months to less than 6% in January 2013 from almost 12%.

Europe credit quality in 2012 was helped by a dearth of debt-funded mergers and acquisitions, although there is evidence that this is picking up.

Most recently, Liberty Global's planned acquisition of Virgin Media prompted S&P to place its BB rating on CreditWatch negative in anticipation that leverage would increase.

The increase in leverage turned out to be reasonably modest to just 3.4x Ebitda on a secured basis from 3.1x.

Buyout firms have also accelerated talks with lenders to secure funding for a possible GBP10bn bid for Everything Everywhere, according to banking sources, in which would be the biggest private-equity backed acquisition in Europe since the financial crisis.

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