Amid arid conditions in the debt markets, the problem of how to re-finance highly leveraged portfolio companies is a dark cloud that continues to hover over large buyout firms. According to data from ratings agency Standard & Poor's (S&P), the bulk of the refinancing risk kicks in during 2013 and 2014 – but GPs know it would be rash to put off taking action until then. The hunt for liquidity is on – and Europe's high yield bond market may offer a solution for some.
“After freezing up in mid-2007, there are signs that the high yield bond market is starting to thaw in Europe”, says an S&P report. While a surge in new issues in the first half of this year largely stemmed from investment grade issuers, there were signs that speculative grade issuance was starting to take off around April. S&P credit analyst Paul Watters says a new trend is for senior bank debt to be replaced by bond debt rather than the more common issuance of high yield debt to repay senior secured bank debt.
But does the high yield bond market have enough potential capacity to make significant inroads into the buyout debt overhang? “Arguably there is a lack of properly structured issues rather than a lack of demand,” suggests Watters. “Clearly there is significant demand for well structured high yield paper from the right type of credit highlighted by the fact that in the last month or two some high yield issues have been between 5 and 10 times oversubscribed.”
Furthermore, Watters sees no fundamental reason why Europe's high yield market should not mature as fully as its US counterpart. “Europe was over-banked and leveraged finance over a five or six year period was heavily dominated by private equity. It was not necessarily in the best interest of banks and private equity firms to support the development of a public high yield bond market in Europe. Given the problems in raising debt funding today, it is in everyone's interests to reconsider the role that the high yield market could play.”