Fresenius Nudges Open Euro HY Gate

Healthcare provider Fresenius's much-anticipated dual tranche high yield bond-the first high yield deal to hit Europe since July 2007-has injected a dose of optimism into an otherwise browbeaten market.

The deal, which priced at a discount of 93 but quickly rose to trade at par in the secondary market, does not likely portend an instantaneous flood of new issues. But market participants believe it has, nonetheless, piqued the interest of a high yield market that has been ready and able to go for some time now, and would quite happily buy high quality credits should bankers choose to bring them.

Leveraged Finance News spoke to a sellside player and a buysider to get their take on the Fresenius deal and the prospects for a resurgence in the European high yield market in 2009. We spoke with Eric Capp, global head of leveraged capital markets at RBS, London, which led Fresenius, joined by BNP Paribas, Credit Suisse and Deutsche Bank. And we chatted with Chris Brils, head of high yield at Pall Mall Investment Management, London. Brils and his team manage the Pall Mall High Yield Europe Plus fund.

The Seller

LFN: Fresenius is the first high yield bond to price in Europe in 18 months. Why did you choose to bring this issue to market now?

Capp: The market had a difficult time last year as investors sold risky assets. Late last year and in the very beginning of this year, we saw some inflows into high yield mutual funds in the U.S. and Europe, as investors viewed the market as cheap. Fresenius is almost the perfect credit from a high yield perspective: It is one of the highest quality corporate names in the noninvestment grade market; it's a solid double-B; it's a defensive health care company, and it's doing very well and growing. We knew there would be significant demand for this type of issue, both in the U.S. and in Europe.

Seems you were right. The issue apparently was snapped up by investors and did very well on the secondary. Given the current circumstances, do you think pricing was decent?

Capp: Fresenius's euro bonds have historically traded very tight, so when the deal was announced, the price widened and investors did demand a significant new issue premium to do the deal. The post-pricing rally was very high by historical standards, but you would have expected some of that given the nature of the market.

The high yield market has been waiting for ages for an issue. How does it compare to the leveraged loan market in terms of being ready and equipped to deal with new issuance? Are high yield investors in Europe in a better position than their loan counterparts?

Capp: High yield investors are currently in a better position than leveraged loan investors for new issues on a relative basis, although both asset classes performed poorly in 2008. The reason is that the technicals in the high yield market are slightly better with respect to capital inflows, and the existing capital is stickier. The investor base is predominantly institutional, and today tends to be composed of long-only, unlevered money. On the leveraged loan side, there were more than a few hedge funds that bought loans in total return swap (TRS) facilities, and banks own leveraged loans. The deleveraging of the loan market started with hedge funds and is now slowly spreading to banks. As a result, there has been more technical selling pressure in loans, which we believe is likely to continue.

What are high yield investors looking for in a deal at this stage?

Capp: At this stage in the credit cycle, investors are tending to favor higher-rated defensive companies in sectors like infrastructure, healthcare and cable/telecom. I think it is a bit early for cyclicals and single-B credits, generally. But that being said, high yield credits always have a story, although it would have to be very, very good for investors to move down the credit curve from double-B.

Do you think we'll see more high yield issues now that Fresenius has priced?

Capp: I hope so. There are positive trends, namely deleveraging by banks. As part of that process, banks will have less capital to invest in the loans of non-investment grade companies, and over time, that will push corporates into the bond market, where they can get non-amortizing, flexible long-term debt without maintenance covenants. Also, the likelihood of triple-B companies being downgraded as we go through the credit cycle is high, so there should be an increase in the number of potential issuers in the high yield market as well.

The Buyer

I understand Fresenius was popular and was snapped up.

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Eric Capp