2023-09-24 05:00:34
With the roof of the types and a impasse before the economy can completely derail into recession, experts see a technical window to go to the capital market with less solvent names that hadn’t been seen in months. It is the first opportunity in 2023 to issue Junk bonds.
Advisors specialized in the segment high yield (high-yield bonds, without investment grade, which is the high solvency rating of the rating agencies) or leveraged loans (leveraged loans) already have a list of 20 relevant European proper names who plan to go to the market between September and October, according to financial sources.
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This is a window that opens before the end of the cycle of interest rate increases, after the increase by the European Central Bank (ECB) a week ago, up to 4.5%, while the Federal Reserve (Fed) he might have a single additional move left. Likewise, although the macro outlook is worsening, with data of contraction in the manufacturing industry, the resilience of the labor market and the services sector still maintains investment appetite. It is true that if the economic outlook improves, and inflation moderates more than expected, the scenario could be better in 2024. But there is a risk that the opposite will happen, and that Missing this window means having to go to the market at prohibitive prices..
It must be taken into account that in many cases companies come to refinance facing upcoming maturities, so they must obtain liquidity before a specific date. Thus, between the last year and a half and two years before said deadlineissuers test the market to find windows like this.
Along with the macro reasons, the fact that there are investors waiting to buy paper also adds to building this window. “In the Leveraged Finance market (high-yield debt and leveraged loans) we are in one of those moments that we call a market window. On the one hand, there is a consensus regarding the end of the rate hike cycle (with cuts planned for next year), the progressive containment of inflation and the expectation of a moderate slowdown in economic activity, which provides a certain visibility of the macroeconomic environment that favors investment and financing decision-making”, argues Javier Gómez Hernández, managing director leveraged finance in BNP Paribas.
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The other reason, adds the expert, is that “we have a good technical market moment. After several months with a very low volume of operations, because issuers that did not have immediate needs have been waiting for better market conditions, debt investors have been progressively accumulating liquidity who at this moment are willing to invest in new operations with attractive conditions for them. This accumulated demand, in turn, has allowed a recovery of prices in the secondary market and a positive expectation for issuers regarding the terms at which they will be able to finance themselves.”
This week, on the other side of the Atlantic, the leveraged loan market has reopened with the payment processor WorldPay. A group of banks led by Goldman Sachs and JP Morgan launched a $4.4 billion debt sale to finance GTCR’s purchase of a majority stake in the company, according to Bloomberg.
It is a relevant operation that shows that there is a window that has just opened with interest rate stability
This is a relevant operation that shows that there is a window that has just opened with interest rate stability and investor appetite. The offer has been between 3.5 and 3.75 percentage points above the Secured Overnight Financing Rate (SOFR), which this week is above 5%. That investment banks venture to lead this type of operation, which is lucrative if there is investor interest, can be disastrous in changing markets because they have to keep the paper and end up selling it at a discount, implies that they see that they believe there is appetite.
This window “represents a great opportunity for issuers,” insists Javier Gómez, from BNP, one of the most active banks in the market, recommending to non-investment grade clients take advantage to broadcast between September and October and secure your next liquidity needs.
“In the European market, we estimate more than 20 operations that may go on the market after the summer, mainly bonuses high yield (rather than leveraged loans) and refinancings (versus M&A). Given the difficulty of having visibility over the duration of each window and that the accumulated liquidity is limited, our recommendation is to advance the release to the market,” comments Gómez. “Except for specific reasons for each issuer or transaction, in principle we do not consider it advisable to wait to 2024 to go on the market. In addition to the depth of liquidity accumulated by investors and other factors that are more difficult to predict (for example, geopolitical ones), we see the risk that the expected macroeconomic scenario is worse than expected, which could affect the general sentiment of market,” he warns.
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Already after the summer, there have been several broadcasts high yield at lower costs than they would have suffered months ago. Boels obtained financing of 400 million this month at 6.25%, a level that was reduced from what was expected due to demand. Another example has been that of Banijaywhich has raised 540 million at 7% and 400 million at 8.125%.
The current differential of high yield with the risk-free rate, the bund German, it is at 400 basis points. This is a very tight valuation, as explained this week in M&G, a firm that recalls that the price of issuers with a spread of more than 1,000 basis points anticipates a default ratio of between 3% and 4% in one year, a level lower than that of other economic crises.
In fact, the index of high yield in euros Bloomberg has appreciated 7% so far this year, after a year of falls in 2022. “More has been gained in high yield what in investment grade so far this year,” says Rafael Valera, CEO and manager of Buy & Hold. “Subordinated debt, which is where we find the clearest opportunities, has rating high yield mostly. However, we currently see more value in emissions investment grade and, for this reason, we have increased positions in this segment”.
With the roof of the types and a impasse before the economy can completely derail into recession, experts see a technical window to go to the capital market with less solvent names that hadn’t been seen in months. It is the first opportunity in 2023 to issue Junk bonds.
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