European High Yield Bonds Wrap 2023

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Aggressive Terms Swamped by Wave of Refinancings but Overall Covenant Capacities Increase

This year-end wrap examines covenant trends seen in the European high-yield bond market in 2023, and what we expect to see in 2024. We will cover trends in 2023 European sustainability-linked high-yield bonds and in 2023 leveraged loans in separate reports. An analysis of the trends seen in the European restructuring market is available HERE.

Key Takeaways

• Aggressive covenant terms generally retreated, driven by a wave of refinancings that recycled existing covenant terms. Somewhat counterintuitively though, overall general use covenant capacities largely increased. However, the two don’t always move together, as we explain below.
   
• Some new aggressive terms appeared, despite the overall retreat of aggressive features, including a “no worse than” test for ratio debt. Some other aggressive terms, such as 2x contribution debt, held steady.
   
• Investor pushback declined and was concentrated in a relatively small number of deals. Value leakage and debt incurrence remained the principal areas of focus for pushback.
   
• The outlook for 2024 likely involves more of the same, but a variety of macroeconomic and political factors may turn the dial one way or the other. Sponsors in particular will be looking for a revival in the M&A market, which could change things considerably.

Covenant Capacities and Investor Pushback

We saw a general tightening in bond covenant terms, although aggressive terms continued to appear in good credits. Covenant terms were tempered somewhat by the large number of refinancings, which tended to use substantially similar covenant terms to the bonds being refinanced to encourage existing investors to roll into the new bonds. They were also affected by the decrease in M&A financings, which tend to feature more aggressive terms – a prime example being Synlab’s 2031 SSNs backing its LBO by Cinven, which had some of the most aggressive covenant terms seen in 2023.

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