European High Yield Rises from the Dead

I supposed I could let Oct. 31 come and go without the gratuitous Halloween metaphor, but it is tough to resist—the European high yield bond market in 2008 really was dead enough to make the zombies staggering across the screen in "Zombieland" look downright spry.

As Craig Abouchar, a portfolio manager at London’s Axial Investments and chair of the European High Yield Association, put it, “When it’s dead here, it’s really, really dead.” 

But thanks to restructuring needs and a continued dearth of bank debt, the European high yield market in 2009 is experiencing a resurrection Dr. Frankenstein would be proud of, a topic Matthew Sheahan delves into deeper as part of our special international features section.

At the EHYA’s 4th Annual European Leveraged Finance conference in London Wednesday, restructuring and how companies in Europe are going about it was one of the main topics. And the answer to that question, much like in the U.S., seems to be: with high yield bonds, and increasingly with senior secured bonds.

According to Abouchar, the leveraged finance markets in Europe have begun to consider high yield bonds a more flexible asset class, rather than just a form or junior debt. “Historically high yield has been viewed as a subordinated debt product, but now, with the new issues Europe is seeing, high yield bonds are being used as an alternative to secured bank debt.”

In her feature piece, Savita Iyer looks more extensively at the rise of the senior secured bond in Europe. And like the market participants she interviewed, Abouchar points to a change in bank attitudes as the key to opening the door to senior secured bonds.

“Banks have historically resisted having bondholders along side them in the cap structure,” Abouchar said, largely because of uncertainty regarding bankruptcy laws. “Banks didn’t want more aggressive bondholders lending along side them and having a role in the restructuring,” he said. “But now, if they can de-risk by selling high yield paper, they will.”

And Europe’s market watchers believe we’ll see more of these deals, as restructuring needs are not going away, and Europe must undergo a regulatory overhaul before leveraged loans find mass appeal with a more diverse institutional investor base, i.e. anyone other than CLO managers. 

Meanwhile, rounding out our special international features section, Richard Kellerhals writes that European and other international investors are being courted by U.S. fund managers with a good story to tell about returns and prices here.

And that news would definitely have to fall into the “treat” category.

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