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Anyone for cov-lite?
In our post-credit crunch era of avowed simplicity and rigorous credit analysis, you’d have thought that bond investors would be demanding tougher terms than ever to finance high yield companies.
Not at all, according to recent research by Moody’s on the growing European high yield bond market, where deal structures are looking rather toppy.Â
Moody’s highlights recent high yield deals by issuers such as Virgin Media and Wind, noting that the deals’ structures and documentation have in common some featuers seen in top of the market covenant packages from 2006.
For example, recent documentation allows companies in some cases to add back to cashflow items such as expected cost savings from restructurings. That could enable them to take on greater amounts of debt in their leverage tests, Moody’s says. The rating firm also notes that fallen angels who have been junked have continued to issue with investment grade-style debt covenants.
Unending pain in CLO land
Rating firms and analysts have been lowering high yield default forecasts in recent months, but there’s still plenty of pain in store for the banks, insurers (and taxpayers) who own collateralised loan obligations, funds that package leveraged debt.
Here are some cheery stats from Fitch Ratings, which is busy setting about downgrading more European CLOs.
A bit of a mezz in the Carwash
It’s not all bad news for mezzanine investors after the recent UK court verdict on the debt restructuring of IMO Carwash, the Carlyle-backed management buyout which defaulted earlier this year. Senior lenders devised a plan transfer its assets to a new company, leaving junior-ranking mezzanine investors with nothing. The mezzanine debtholders contested the plan, but a UK judge disagreed and approved it.
That is a blow for mezzanine investors everywhere, because it tips the balance in favour of senior lenders for future restructurings under so-called schemes of arrangement. But they shouldn’t feel too hard done by, and the judge’s arguments may even help them in future.
from Neil Unmack:
Bond investors won’t bail out private equity
Private equity and European high-yield bond investors have an awkward relationship. Investors recoiled from the market after telecom companies went bust in the dot-com crash. Issuance picked up during the recent credit boom, but PE firms raised most of their funding through private bank loans, many of which were repackaged into collateralised loan obligations (CLOs).
Now that banks won't lend and the CLO machine is broken, financial sponsors need to find a way of refinancing the hundreds of billions of euros of loans that will come due over the next five years (S&P estimates over 500 by the end of 2015).
Irrational exuberance in high yield
It’s shouldn’t be surprising that investors are feeling giddy. The world financial system didn’t collapse, big banks are making hand over fist and stock markets, well, stock markets have been on fire (today excluded). But a V-shape economic recovery in the U.S? Really?
Well that’s what the riskiest portion of the high-yield corporate debt market is pricing in. Bank of America analysts say they’ve never seen anything quite like the rebound in CCC-rated corporate debt – the lowest of the low when it comes to credit quality. The CCC index is nearly at 70 points, 10 points above its normal level seen in 1990-91 and 2001-02 and well above the sub-40 trough seen at the peak of the credit crisis.
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The Wall
