Summary

• High Yield volumes are almost 40% higher than in 2020 and 2017, at nearly €140bn
• Across ratings, EHY printed almost €70bn in Double BB and €55bn in Single B – the latter has increased its proportion to ~44% of EHY Universe. Triple CCC deals have coincided with lower spreads, and dividend recaps are back at 2017 levels. The ‘Fitch Premium’ is increasing for EUR-GBP debt, and offers ~one-notch uplift versus other agencies 
• By Industry, Consumer Discretionary printed €33bn, followed by Telco-driven supply in Communication Services (€20bn), and in third place, liquidity demands pushed Industrials’ supply to €19bn
• Strong buy-out financing in Q1 and Q4 pushed M&A to record volumes
• Sterling debt reached a new record, offering €17.7bn (equiv.) in supply
• Green, and in particular sustainability-linked debt now makes up nearly 20% of HY volumes
• 2020 vintage deals have outperformed the 2021 crop
• Compression in spread differentials between concurrent SSNs and SUNs has reduced the pick-up to an average of 155 bps
• FRN issuance remains strong in Italy, although overall FRN supply still lags inflation on a historical basis
  

Broken Records

No surprises here, we’ve seen bumper issuance in 2021. With only slight cooling in the traditional August break, and more recently in the last few weeks, full year volumes are nearly €140bn. This is almost 40% higher than in 2020 and 2017 – both record years in their own right. Note for the above chart we have included only Eurozone (and UK) currency debt.

Saving the best for last

Double BB volumes have book-ended the year, printing almost €70bn (equiv.), followed by Single B which managed around €55bn, dominating the central portion and October. Triple CCC deals peaked in January (€1,324m), May (€1,160m) and October (€1,124m).

Over the longer horizon, the proportion of single Bs has again increased, from ~31% in 2019 to ~44% in 2021, with a corresponding decrease in double BBs from ~66% to ~51% over the same period. Triple CCC issuance is also at a seven year high, marking nearly 6% of total volumes.

Triple Hooks

Looking closer at triple CCC tranches printed in the past six years, it makes sense that issuance correlates with lower spreads. Recapitalisations have coincided with the lowest, or lowering periods in each cycle – at the previous floor, in 2017 we saw tranches from Verallia, Salt, Kloeckner, Verisure and Picard. We’ve now matched that feat in 2021, with the return of Verisure and Picard, alongside Foncia, Alain Affelou and Lottomatica.

In June we turned to High Yield’s worst kept secret – that you’re likely to receive a better rating from Fitch than Moody’s or S&P – and interestingly, that this divergence appears to be increasing. Updating for the latest figures, the trend for EUR-GBP debt still indicates you’re likely to get around a notch increase (the equivalent to BB- rather than B+), and rating conscious issuers might want to steer clear of Moody’s, which remains more stringent. For USD rated deals there is an even greater discrepancy, and for 2021 it seems you’re on average likely to enjoy a 1.2-notch uplift with Fitch versus Moody’s. We should note here that the difference between Moody’s and S&P isn’t directly comparable (for cost reasons few companies pay for all three agencies), but the comparison holds between Fitch and either of the other two agencies.

Industry splits

Consumer Discretionary names have consistently dominated this year, printing almost €33bn. The sector has certainly been intriguing – with historied refinancings (Pizza Express, McLaren, David Lloyd), hung bridges (Golden Goose), and more exotic structures (Burger King France) to name a few examples.

There’s also been no shortage of Telco deals – we tracked twelve – which made up the bulk of €20bn of supply in Communication Services. These include the monster €3.2bn Iliad buy-out, more than €2bn from Masmovil Ibercom for its acquisition of Euskaltel, and the recent bond portion of the Apax and Warburg Pincus T-Mobile Netherlands LBO. The jumbo €33bn buyout offer from KKR for Telecom Italia could add further supply in 2022, although is still subject to a potential ‘golden-power’ block from the Italian state, and resistance from existing shareholder Vivendi. Patrick Drahi also looms over BT, recently announcing that Altice had increased its stake from 12 to 18 percent, however – as the FT reports – Altice has declared it will not make a takeover bid in the next six months, unless there was agreement with the board or a rival bid.

Industrials place third, issuing €19bn (equiv.) across the year, with many firms taking advantage of cheap financing to boost liquidity and rearrange initial pandemic financing. German flag carrier Lufthansa has dipped into the market for more than €4bn, IAG for more than €2bn, and Air France KLM for €800m. The UK’s second airport – Gatwick – also debuted in HY, offering £450m to support liquidity and pay down bank debt.

High Yield M&A booster

Just as with overall volumes, M&A has had a bumper year, especially from strong buyout funding in the first and final quarters of the year. We’ve seen 24 tranches in Q4 issuing an impressive €11bn (equiv.) in bond financing for sixteen target firms. More broadly across M&A; Modulaire, Arrow, Grifols, T-Mobile Netherlands and Faurecia-Hella all tapped the market for €1bn-plus combined HY offerings. 

Always fascinating to follow – Asda also returned with new £500m SSNs due 2026 to part fund its £750m Forecourt Disposal Bridge Facility after the failed sale-and-leaseback transaction of these assets with EG Group. It has since emerged that the Issa brothers are mulling a $35bn merger between the two groups.

Sterling resurgence

Sterling resurgence

2021 also tops the charts for Sterling issuance, with best sellers from Asda (£3,250m), Together (£1,000m), Medical Properties Trust (£850m) and Constellation Automotive Group (£695m) – to name just a few. Even without the jumbo £6.6bn Morrisons financing (of which £3.6bn expected in the bond market), volumes are still ~ €3.5bn up on 2017.

Eat your greens

It would be hard to leave out ESG in a round-up for 2021. Green bonds, and in particular the emerging SLB, continued to flourish, jumping to nearly 20% of all deals by volume. 9fin’s ESG analyst Jack David summarises the year:

“The flood of new green and sustainability linked deals in 2021 represents the enormous interest in ESG and the green transition by both investors and issuers. Nonetheless, companies are increasingly being questioned on their convictions on everything from sustainability-linked bond covenants to Net Zero strategy credibility. Without reliable and timely data, analysts have found it hard to trust not only the issuer’s own word, but also the opinions and methodologies of second party consultancies and even reputable independent verifiers, such as those assessing science-based targets. With a slew of new initiatives, alliances and regulatory requirements on the horizon, the hope is that investors will have more clarity across ESG factors in 2022. ”

New Issue Performance

Here we show how bonds issued in each quarter since the start of 2020 have performed versus their respective issue prices. The average price for 2020 HY debt is currently 101.6, while for 2021 it’s 99.8. Although you’d expect more dispersion the further back you look (newer deals should have risk priced into them), the higher spreads in 2020 probably offer resilience, and are on the whole performing better. You can see in the green box the best performing are predominantly fallen angels. In 2021, the red box shows us some familiar names – those most affected by supply chain disruptions and raw material costs, and credits caught in the fallout surrounding Adler Group. 

Spread differentials

There’s another interesting turning point we’ve tracked in Primary – lower compensation for playing in the unsecured tranche of a SSN-SUN offering. Although we don’t account for tenor mismatch, you can see broadly tighter spreads between concurrent SSN and SUN offerings throughout 2020 and 2021. The average spread across the period 2013-2019 was 215 bps (EUR 210 bps, GBP 214 bps, USD 222 bps), trimming to 155 bps throughout 2021.

Investors typically expect a wider spread differential when there’s more unsecured leverage in a capital structure (i.e. greater difference between secured leverage and total leverage), or in deals with lower equity cushions. 

Rising levels and Floating Rates

As we explored earlier this year, there appears to be a nice correlation between FRN issuance and inflation, although the recent price level jumps have so far outpaced (the admittedly increasing) FRN volumes. However, total volumes of EUR-GBP Senior Secured FRNs topped over €10bn in 2021, almost doubling the €5.4bn issuance in 2020, and €7.7bn in 2019.

Floating rate instruments allow the bearer to benefit from any increase in the underlying benchmark, which in turn is governed by the applicable base-rate. In a world of high inflation, any observer who views increasing price levels as non-transitory should expect some form of central bank tightening – either through a reduction in QE, or a rise in rates – seen most recently by the BoE’s hike to 0.25%.

A New Renaissance

With FRNs the closest instrument to a leveraged loan, regulation in Italy has historically pushed borrowers into the bond market, and so FRNs have commonly made up a significant portion of larger LBO financing. In 2021 we tracked eleven Italian LBOs – most recently Apollo’s Reno De Medici €445m SS FRNs – of which seven either wholly or partially funded the acquisition in the floating rate market. In 2021, Italy made up almost 40% of floating rate supply to the European HY market.

Senior Secured FRN issuance has topped €4.5bn, improving on FY 2019 and FY 2020, and including Secured and PIK tranches, overall volumes from Italian issuers are now more than €10bn, greater than 2017 volumes.

Looking Ahead

After a well deserved break, we’re expecting a busy January, and away from the buy-out pipeline, almost €60bn (equiv.) of GBP-EUR debt is trading to call in 2022 (~€40bn in 2023).

Clients can view the forward pipeline here. If you are not a client but would like to see a copy, please complete your details here.

And that’s a Wrap, thank you to all our readers this year. We wish you happy holidays and look forward to returning in the New Year.