September 28, 2018 / 2:13 PM / 2 months ago

European high-yield M&A volumes at three-year high

LONDON, Sept 28 (IFR) - European high-yield issuance backing M&A activity has surged to a three-year high in 2018 thanks to record levels of global M&A.

Year-to-date such borrowing stands at €10.8bn, according to data from Deutsche Bank, a 66% increase on the €6.5bn that cleared the market in the whole of 2017.

This is the highest since 2015, when €21bn printed, and accounts for 21% of total high-yield volumes this year versus just 7% in 2017.

The increase is a result of the global surge in M&A, which has led to larger buyout deals that cannot only be financed in the leveraged loan market, and which require bonds given they often include unsecured debt.

Such activity was boosted in September by the bond components of jumbo buyouts for Thomson Reuters’ Financial and Risk business Refinitiv, which includes IFR, and Akzo Nobel’s speciality chemicals business.

However, its increased prominence is also the result of a fall in general refinancing activity this year.

“You had a period where companies refinanced because they were securing cheaper and cheaper funding levels, as well as extending maturities,” said Nick Burns, strategist at Deutsche Bank.

Refinancings in 2017 accounted for 63% of supply, but the share has fallen to 51% this year, according to Deutsche’s data.

“But now, we’re at a point in the cycle where spreads have widened this year and yields are rising, so the rationale isn’t as easy as saying you’re refinancing because you’re securing a saving on your interest payments,” Deutsche’s Burns said.

The fall in refinancing is also due to a smaller number of bond call dates falling in 2018, according to an investor.

More M&A issuance is coming up, with deals backing Italian drugmaker Recordati’s takeover by CVC, Sivantos’ merger with Danish peer Widex, and UK gambling technology firm Playtech’s acquisition of Italian peer Snaitech waiting in the pipeline.

“The recent LBOs provide a positive message on the market both in terms of how much capital is available for LBOs of larger businesses and how the market is pricing risk, which should make leverage more attractive,” Tim Morgan, head of high-yield syndicate at HSBC, told IFR.

However, issuance is expected to slow down from mid October, according to bankers.

“If you look at the supply side and the assets coming up for sale, the M&A pipeline is a little bit quieter than what we’ve seen earlier this year. It is starting to pick up a bit but there’s a time lag, so it’s probably next year’s business for the financing markets,” Morgan said.

“I think that high-yield will continue to be a popular product for corporate acquisition finance as it represents flexible and low-cost debt.”

Year-to-date total European high-yield volumes have reached €51bn, compared to the €90bn issued in 2017, according to the Deutsche Bank data. (Reporting by Yoruk Bahceli, editing by Alex Chambers, Julian Baker)

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