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Josh Latham

Matthew Hughes

In what has been a volatile year, European high yield still managed to print. We’ve taken a look at some of the key figures and trends throughout 2023:

European high yield companies issued €53bn in 2023, an 8% rise from the €40bn issued in 2022

Refinancings dominated, representing 66% of issuance. LBOs on the other hand were minute compared to previous years, with only six such deals going the bond syndication route

Borrowers lower down the credit curve are paying up to refinance. Based on current yields and average coupons, B2/B rated companies could face a 1.4x hike in funding costs in a refinancing, while B3/B- rated companies are looking at a 1.6x increase

There has been a flight to quality, with double-Bs making up 49% of 2023 issuance, versus 27% in 2022 and 42% in 2021

Average bond tenors fell to 4.9 years, with issuers choosing shorter dated bonds and lower non-call periods

Over €34bn of bonds are set to mature in 2024, with the figure rising to €60bn in 2025 and €100bn in 2026

2023 has been characterised by opportunistic issuance windows. These short pockets have allowed a selection of credits to enter and get deals across the line.

“It’s been more about the cost of financing, rather than the availability to finance,” claimed one sellsider who spoke to 9fin.

According to 9fin data, 23% of European high yield (EHY) issuance came in the top five busiest weeks of the year. This included mid-May, when risks related to the US banking crisis subsided, and part way through November, as market expectations rose about the prospect of rate cuts in 2024.

“I think next year you may see some deterioration in margins, but this will be offset by rate cuts,” said a buysider. 

Forecasts from central bank officials in the US point to 75bps worth of cuts next year. In contrast, Bank of England officials commented yesterday (14 December) that rates must stay higher "for sufficiently long" to combat inflation.

Link: Chart. Note: all data includes issuance by European borrowers

Refinancing dominated the EHY market this year, representing 66% of total issuance. Meanwhile recapitalisation returned in 2023, after an almost non-existent 2022. Allwyn (Sazka) came to market in April with a chunky €675m repayment of Apollo preference shares. Guala Closures came later in the year with a €250m shareholder distribution. 

Fortunately for 9fin subscribers, we predicted some of this year’s deals before they happened. Take a look at the full list of 9fin Deal Predictions here.

€53bn of HY issuance is not a bad effort considering interest rates are at their highest levels since 2008, which might have deterred some sponsors from going the HY bond route. But HY LBOs slumped in 2023, with only six such buy-outs — contributing only 7% to 2023 issuance versus 23% in 2022 and 16% in 2021. Instead, private credit took the lion's share of LBO financings, with a large chunk of deals still in the pipeline.

“LBOs have significantly slowed this year, but we're coming from a decade of Eldorado for PE firms,” said a second buysider.

For the deals we have seen this year, sponsors have had to contribute more equity to get them over the line. There has been an uptick in equity cheques, averaging 54% in 2023, which compares to 48% and 46% in 2022 and 2021, respectively. Yet notably the take-private of Synlab by Cinven and the Qatar Investment Authority came in at an aggressive 26% equity stake. However, the deal features a lofty PIK component, which pays Euribor+1,025bps.

“Interest rates have been an important factor in 2023, but the gap between investors’ requests and lenders’ conditions has possibly been even bigger,” said a second buysider. 

Further analysis of European buyout trends can be found on 9fin here.

Amend and extend deals were prevalent in the leverage loan world (accounting for 55% of European issuance), but the same can’t be said for bonds. Only Accentro and iQera extended bonds in 2023, which followed NewDay andStada A&E’s at the back end of last year.

Those borrowers that did brave the market in 2023 had to pay up — evidence of the impact of government rate hikes. Average fixed-rate coupons for B3 borrowers were 350bps wider at 9.80% in 2023 versus those in 2021. The ICE BofA European HY bond index also widened from 280bps at the start of the year to 658bps at the time of writing.

“Borrowers are sitting on the sidelines enjoying the ride today, not wanting to crystallise higher costs,” said the sellsider.

But as we discovered in a recent maturity wall analysis, borrowers will have to come to market soon. According to 9fin data, over €60bn of bonds are set to mature in 2025, with the figure rising to over €100bn in 2026. 

“People will have to get off the fence in 2024, a lot of refinancings need to get done quickly,” added a second sellsider we spoke to. Given this, we expect a lot of refinancings in the first half of 2024, with about €35bn of bonds set to turn current. These include borrowers with large capital structures such as Ardagh, Loxam and Grifols. The list can be found on 9fin here.

By comparing current yields to average coupons, we gain a clearer image of the uplift in funding costs for different rating groups. For example, credits with BB/Ba2 rating have an average coupon of 4.3%, but are yielding 5.7% — suggesting a 1.3x rise in funding costs.

This trend isn’t linear either, with borrowers lower down the credit curve expected to pay up in a refinancing. B/B2 rated companies could face a 1.4x hike in funding costs, while B- rated companies are looking at a 1.6x increase.

As observed below, there could be some value among BB- rated borrowers, with the average YTW trading higher than their B+ counterparts.

Given the volatility of rates, we’ve seen a flight to higher quality in EHY. Double-B borrowers were more active than in recent history, accounting for 49% of issuance versus just 27% in 2022. For example, double-B borrowers issued €4.3bn in April after the regional banking crisis shut markets.

Triple-C issuance was muted. This compared to 2021 when we commented that triple-C issuance had hit new heights, with a large portion of issuance for recapitalisations. Yet, given the higher spreads, it makes sense that issuance is down. Additionally, recapitalisations have typically coincided with the lowest, or lowering periods in each cycle.

There has been novel bond documentation during the year, including Altice International’s defeasement, and FNACDarty proceeds flexibility. The latter was not widely accepted by the market and the borrower pulled the deal during syndication.

Borrowers and arrangers have also looked at the best way to structure financings in this turbulent market. Notably, there has been an uptick in floating rate issuance over the past two years — accounting for 17% in 2023 versus only 8% in 2021. The expectation of rate cuts in the near future and better pre-payability terms can also explain the increase in FRNs. 

In November, Lottomatica dropped its fixed rate tranche, opting instead to lean on CLO demand and issue just FRNs. CLOs have a limit for bond format issues, but this is typically much looser than the limit on fixed rate assets, so it’s not usually a constraint for FRN issuance.

Cheplapharm also issued the first floating rate note in its history.  A list of Italian borrowers, including Biofarma, Cedacri and Cerved, opted for the FRN route. We discussed the reasons for the prevalence of FRNs in Italy in greater detail in 2022 here.

Sticking with bond structures, borrowers preferred shorter-dated bonds, hoping to refinance earlier when the bonds roll off their non-call period. In 2023, the average tenor in European high yield was 4.88 years, which compares to 5.3 and 6 years in 2022 and 2021, respectively. A handful of issuers also chose three- and four-year tenors, bringing the average tenor below the favoured five-year bond. Inevitably, this meant issuers featured lower non-call periods on average, allowing them to refinance should conditions improve in the next couple of years.

Given the flexible pre-payability, as well as the benefits received from lower future bank rates, it makes sense to raise loans in this market. This could explain Synlab's reasoning for upsizing the loan portion of its LBO, while also reducing the bond component. However, there is a cost associated with this: the loan portion will pay more to begin with, priced at E+475 (Euribor is at 3.9%) versus 7.87% on the fixed.

Yet floating rate debt isn’t for all. Boels Rental became a debut HY bond issuer in September with €400m of SSNs, having previously only held leveraged loans in its capital structure.

Consumer discretionary deals came out on top this year — we followed 33 with a combined value of €12.5bn. The sector is pushing through inflationary pressure and weakened consumer spending, with EG Group refinancing its 2025 notes with €1.1bn of SSNs, €468m of SUNs and a privately placed $500m of SS PIK FRNs each due 2028. Yet this did not come cheap for EG, which paid out coupons of 12% on the dollar and 11% on the euro notes.

Consumer discretionary reclaims the top spot from the telecom industry, where volume fell across 2023 but still hung onto second place with 20 deals across 2023 at 18% of total issuance. Telcos, which have notoriously large cap stacks, have been feeling the crunch of late, with many already splitting their businesses through an asset sale, spin-off, or demerger. 

Industrials grew to 17% of issuance, with firms marketing off strong numbers while cost pass-throughs have taken place. Materials jumped this year to 13% of the market — despite demand destruction and de-stocking throughout the chemicals industry. 

Continuing the trend of declining sterling issuance from the back end of last year (which former UK Prime Minister Liz Truss sparked with her ‘mini-budget’), 2023 brought a dramatic slump in GBP issuance levels — falling from 13% in 2022 to only 4% in 2023. After a brave refinancing from Travelodge in May, Pure Gym and B&M retail closed out the year with their own gutsy refinancings of £475m and £250m of Senior Secured Notes, respectively. 

These handful of borrowers proved sterling is still in fashion, albeit at a price. Iceland SSN financing featured a 10.875% coupon, while Pure Gym pays 10%.

“There’s a lot of caution around sterling from investors,” said a third sellsider. “There’s doubts about whether there is a deep enough pool of capital for issuers to fill a sterling book. It’s something that’s even been a topic of conversation for euro notes, so you can imagine how much worse that gets for sterling.” 

Perhaps for this reason, Iceland decided to debut a euro-denominated FRN alongside the sterling fixed notes — the first time in the company’s history. The €250m FRNs priced at E+550bps, despite the business operating almost entirely in the UK.

Unsurprisingly, real estate has had an eventful year, with restructurings rife in the sector. You can read our distressed report for further details on the German real estate sector here. On the other hand, consumer discretionary bonds defied recession rumours, printing the largest gains.

“Coming into 2023 we saw companies negotiate really well, and improved inflation, meaning EBITDA margins held up,” said one buysider who was positive on consumer-facing businesses.

Link: Table. Note: Price change year-to-date as of 14-Dec

The largest tranche size was EG Group with a $1,100m SSN due 2028 (November)

Petroleum Geo-Services had the highest coupon this year with 13.5% $450m SSNs (March)

Kedrion had the lowest single B coupon at 6.50% for fixed-rate notes (May)

Telecom Italia was most active, coming to market four times throughout the year (January, April, July and September)

Groupe Casino’s €900m SUNs saw the biggest price fall this year, down 82.5 pts YTD to 0.958

13 debut HY Issuers, including Amara Nzero and Benteler International

FNAC Darty was the only borrower to pull a bond deal during syndication (September)

Our most read content was the A&E Waiting list, the most up-to-date edition is here

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