CORPORATE FINANCE FOCUS | CORPORATE DEBT
French cable and telecom operator Numericable, along with its parent group Altice, recently placed a record $16.7 billion of high-yield bonds with investors, highlighting the growing trend of European companies to bypass loans from banks and go directly to investors when raising funds for mergers and acquisitions. The ease with which the market absorbed the bonds demonstrated the ongoing search for yield by investors in the current low-interest-rate environment.
The European high-yield bond market, long a poor stepchild of its US counterpart, came into its own last year. European high-yield bonds were the best-performing fixed-income asset class in 2013, according to Barclays Capital. Issuance from European companies last year more than doubled from a year earlier. European high-yield issuance totaled $42.7 billion in the first quarter of 2014, up 31% from the same period a year earlier, according to Thomson Reuters.
Credit rating agency Standard & Poor’s says high-yield loans and bonds are approaching pre-crisis levels across Europe, as confidence in the eurozone grows. “We are seeing warning signs of the market overheating,” says London-based S&P credit analyst Taron Wade. An increasing number of new issues have launched with fewer lender protections than was traditionally the case, and second-lien debt issuance is on the rise, S&P says. If the imbalance between supply and demand continues, it “could prove highly destabilizing for credit quality,” the rating agency notes.
“The return of the market for collateralized loan obligations (CLOs), ample liquidity in the high-yield bond market and investor appetite for higher yield are all fueling leveraged finance activity,” notes Wade. While leverage ratios are steadily creeping higher, S&P says, credit quality generally is holding firm, and loan covenants are still prevalent in Europe. If M&A activity continues to accelerate, this could help to provide new investment opportunities and curb the market’s exuberance before it becomes irrational, S&P adds.
US bank regulators published guidelines in March on leveraged lending that focused on private equity. The guidance, while not a formal rulemaking, reflects heightened regulatory focus on sound and well-documented lending practices, according to law firm Simpson Thacher & Bartlett.
The guidance includes a warning of reputational risks stemming from “poorly underwritten transactions, as these risks may find their way into a wide variety of investment instruments and exacerbate systemic risks within the general economy.” The guidance also reinforces the need for financial institutions to adopt a definition of “leveraged lending” in sufficient detail to ensure consistent application across all of their business lines,” Simpson Thacher noted.
NEGATIVE RATINGS PRESSURE ON APPLE?
Apple placed $12 billion of bonds in a seven-part offering at the end of April that included three-year and five-year floating-rate notes, as well as fixed-rate notes and 30-year bonds. Moody’s Investors Service says Apple may need to borrow an additional
$25 billion to fund its share-buyback plan. “However, if debt going forward is increased meaningfully more than the $25 billion now expected by Moody’s, that would be negative and could pressure the [company’s] rating down,” Moody’s says.