High Yield Industry Update
Bond Investors Concerned US Zayo’s 7YNC1 Bond Could Signal Repricing, Further Yield Erosion in Europe
Fri 02/28/2020 04:19 AM
Relevant Item:
Reorg Debt Explained 2019 HY Market Report
A U.S. fixed-rate bond with a one-year non-call period for Telecoms infrastructure Zayo Group has sparked concern among European investors of further erosion of this protective feature. Bond investors fear this feature which is more commonly seen in the loan market may lead to more opportunistic repricings that would reduce their returns.
This comes after European leveraged loan investors have had to endure lower repricing on more than €11.9 billion, $9.3 billion and £295 million of debt so far this year, Reorg coverage shows. Issuers have marketed 23 euro loan repricing deals in January and February combined.
“Call protection is one of the few avenues for investors to generate performance in a low-yield environment. We definitely wouldn’t want to see that eroded further,” said Russell Taylor, European high-yield portfolio manager at JPMorgan Asset Management. “The cost for issuers to call debt is already at or near all-time lows, therefore to also allow issuers to shorten non-call periods doesn’t make a lot of sense.”
Zayo Group priced a seven-year senior secured bond with a non-call of one year in the U.S. on Feb. 21. Reorg covenant report noted that this is the shortest period following issuance in which a series of high-yield bonds can only be redeemed at above par prices that we recall ever seeing. The full review is available HERE.
In Europe bond buyers have noted that three euro issuers have placed eight-year notes with call protection for just three years, instead of a more common four-year period.
These issuers were United Group on Jan. 23, Empark on Jan. 24 and Digi Communications on Jan. 29, all of them with senior secured deals and rated in the single-B area by at least one rating agency. This week, these issues were quoted at par or slightly above.
Concerns over the spread of Covid-19 have led to a slowdown of loan repricing this week, when Messer Industries and Alix Partners pulled the deals. The erosion of non-call clauses in Europe has started over the past few years.
According to Reorg Debt Explained data, Last year, about 24% of deals included a special optional clause allowing for redemption of up to 10% of the notes per year at 103% during the non-call period. This was five percentage points higher than in 2018. The provision cancels the bondholders’ benefit from any capital gains on their investment.
“The non-call protection matters. Its reduction affects the market in more than one way,” said Olivier Monnoyeur, lead high-yield portfolio manager at BNP Paribas Asset Management. “One is that convexity in the fixed-rate high-yield market is clearly deteriorating, and it takes away a potential upside from investors’ portfolios, so people should care.”
Monnoyeur added that “this comes on the background of the continuous erosion of bonds’ covenant packages that has been going on for quite a time now. It also means lower returns for the high-yield bond market, and in the medium and long term, it could make it less attractive to investment and possibly less liquid.”
Leveraged finance bankers told Reorg that private equity sponsors and corporate managers weigh in traditional non-call protections of roughly half the bond maturity versus the flexibility offered by leveraged loans when deciding about their debt issuance choice.
Below is the count of five, six, seven and eight-year non-call periods for European bonds, excluding FRNs, in 2018 and 2019, as compiled using Debt Explained data:
Reorg Debt Explained 2019 HY Market Report
A U.S. fixed-rate bond with a one-year non-call period for Telecoms infrastructure Zayo Group has sparked concern among European investors of further erosion of this protective feature. Bond investors fear this feature which is more commonly seen in the loan market may lead to more opportunistic repricings that would reduce their returns.
This comes after European leveraged loan investors have had to endure lower repricing on more than €11.9 billion, $9.3 billion and £295 million of debt so far this year, Reorg coverage shows. Issuers have marketed 23 euro loan repricing deals in January and February combined.
“Call protection is one of the few avenues for investors to generate performance in a low-yield environment. We definitely wouldn’t want to see that eroded further,” said Russell Taylor, European high-yield portfolio manager at JPMorgan Asset Management. “The cost for issuers to call debt is already at or near all-time lows, therefore to also allow issuers to shorten non-call periods doesn’t make a lot of sense.”
Zayo Group priced a seven-year senior secured bond with a non-call of one year in the U.S. on Feb. 21. Reorg covenant report noted that this is the shortest period following issuance in which a series of high-yield bonds can only be redeemed at above par prices that we recall ever seeing. The full review is available HERE.
In Europe bond buyers have noted that three euro issuers have placed eight-year notes with call protection for just three years, instead of a more common four-year period.
These issuers were United Group on Jan. 23, Empark on Jan. 24 and Digi Communications on Jan. 29, all of them with senior secured deals and rated in the single-B area by at least one rating agency. This week, these issues were quoted at par or slightly above.
Concerns over the spread of Covid-19 have led to a slowdown of loan repricing this week, when Messer Industries and Alix Partners pulled the deals. The erosion of non-call clauses in Europe has started over the past few years.
According to Reorg Debt Explained data, Last year, about 24% of deals included a special optional clause allowing for redemption of up to 10% of the notes per year at 103% during the non-call period. This was five percentage points higher than in 2018. The provision cancels the bondholders’ benefit from any capital gains on their investment.
“The non-call protection matters. Its reduction affects the market in more than one way,” said Olivier Monnoyeur, lead high-yield portfolio manager at BNP Paribas Asset Management. “One is that convexity in the fixed-rate high-yield market is clearly deteriorating, and it takes away a potential upside from investors’ portfolios, so people should care.”
Monnoyeur added that “this comes on the background of the continuous erosion of bonds’ covenant packages that has been going on for quite a time now. It also means lower returns for the high-yield bond market, and in the medium and long term, it could make it less attractive to investment and possibly less liquid.”
Leveraged finance bankers told Reorg that private equity sponsors and corporate managers weigh in traditional non-call protections of roughly half the bond maturity versus the flexibility offered by leveraged loans when deciding about their debt issuance choice.
Below is the count of five, six, seven and eight-year non-call periods for European bonds, excluding FRNs, in 2018 and 2019, as compiled using Debt Explained data:
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