Another week of tentative green shoots for the European high-yield bond market, as French automotive parts company Faurecia increased the size of its 7.25% 2026 sustainability-linked SUN deal from €400m to €700m on Monday.

European high-yield credit has seen a strong rally in recent weeks, and Friday has seen particularly strong risk-on appetite, said a buyside analyst, who expected a handful of new issues before year-end.

Thursday’s CPI print in the US – showing prices in the US rose 7.7% YoY, below the 8% consensus view – further stoked risk on sentiment, with the iTraxx Crossover Index tightening 50bps following the news to 473bps at time of writing.

Despite some twists in the road left to navigate this year – the upcoming Thanksgiving holiday in the US and a spate of central bank decisions in the week beginning 12 December – issuers may yet find spots to sneak out deals before year-end, agreed one banker.

As flagged in last week’s column, issuance volume this year has plummeted, as companies shy away from borrowing in the higher-interest rate environment. ING Bank analysts forecast that total issuance in 2022 will amount to €18bn.

Short-dated BB paper pulls in a crowd

Faurecia’s new bond, which refinances bridge debt backing the acquisition of Germany-based Hella, priced on Monday at par on an accelerated timeframe (originally the deal was expected to price Tuesday) and was increased substantially from the initially announced €400m size.

The new 7.75% 2026s are up nearly three points at 102.8-mid on Friday for a YTM of 6.4%. The deal benefited from solid market demand for strong BB-rated corporate paper, demonstrated by the modest (for current conditions) new issue premium of around 75bps, noted a banker on the deal. “There is a pocket of opportunity [to issue at the moment],” the banker said.

The bond’s short maturity – 3.5 years – was likely driven by coupon considerations, given current elevated yields.

“Faurecia is used to printing with coupons in the two or three percent area,” said the banker. As reported, Faurecia faces little pressure to tap the market again to refinance residual bridge debt, given its ongoing €1bn disposals programme.

The sustainability aspect of the bond involves the final coupon payment in June 2026 ratcheting up by 25 bps if Faurecia fails to meet its target of reducing Scope 1 and 2 greenhouse gas emissions by 80% by end-2025.

While the fact the sustainability component only affects the final coupon payment may raise some eyebrows, the company is limited by how much progress it can achieve in the relatively short time before the bond maturity, the banker noted.

The new bond deal was arranged by BNP Paribas and Société Générale as joint global coordinators and joint physical bookrunners. CIC Market Solutions was joint global coordinator and joint bookrunner. Mizuho, Natixis and Santander were joint bookrunners. Bank of China, Deutsche Bank, Banca IMI and Raiffeisen Bank International joined the deal as co-managers.

Liability management rolls on

While Faurecia’s deal was the only new issue in bonds, liability management exercises continue to proliferate following earlier transactions from Stada and Casino. Notably, Swedish property management company SBB – which has found itself at the sharp end of short-seller reports of late – launched an up-to-€650m tender for its bonds via an unmodified Dutch auction ending 23 November.

According to S&P, the tender is funded through a €750m bridge loan with a one-year maturity (extendable by six months) to be refinanced from disposal proceeds. The company is considering repurchasing up-to-€150m of its hybrid bonds, which currently trade at significant discounts, but S&P said this will not affect the equity contribution the agency attributes to the hybrids.

Meanwhile, Coty, the US-based beauty products manufacturer, launched a bond tender, including the offer to repurchase up to €100m of its 4.75% 2026 SUNs at 93 cents on the euro (inclusive of three cents early tender premium). The offer came hot on the heels of the company’s 1Q23 results, which saw sales grow 1.3% YoY and EBITDA climb 10.6% YoY.

ELFA inaugural conference

This week, the European Leveraged Finance Association held its inaugural conference. According to a post-conference press release, the consensus among participants was that the industry faces a worsening macro outlook with defaults expected to rise in 2024-25 (compared to an anticipated 2% in 2023).

In light of this, the market is expected to now face the repercussions of the covenant erosion which has characterised the last 10 years, in particular where stressed companies are looking to raise new priming finance or push through stressed liability management transactions.

“In the US, the long shadow of J. Crew lingers, and more liability management transactions of even greater creativity have since emerged. This has been wake-up call for investors who must be proactive in discerning whether the covenants might permit this type of behaviour, and it is an open question whether some of the U.S. style transactions would pass muster under English law,” the press release notes.

Movers and shakers

Excluding stressed credit (STW < 10%), the following euro-denominated bonds saw some of the biggest week-on-week moves in spread to worst (STW) terms, according to 9fin’s European price moves screener.

Spread risers

Spread decliners

Leveraged Loan Primary

November looks likely to mark an early year-end for the loan primary market. There could be sporadic opportunistic activity, but market conditions remain shaky and demand is thin. Issuers that don’t need to come to market will likely stay away. A few ghosts of previously hung deals might emerge, but even these have largely been tackled.

“There are few deals that haven't found a home yet, maybe between three and five, but even from those some of them are already half-syndicated,” said a head of leveraged finance syndicate. “We are asked about add-ons but there isn't really much to talk about, so I expect the market to remain really calm until the end of the year.”

Dutch chemical distributor Caldic kept the market ticking over, pricing a €200m TLB tap. The new money will be used to fund a merger with Connell and other M&A activity.

The loan maturing in February 2029 will pay 350bp over Euribor floored at zero, linked to a margin grid and came at 92.5 OID. BNP Paribas was the sole bookrunner on the deal.

Sine the market conditions remain challenging, borrowers with deals maturing in 2024 and 2025 are likely to be looking to negotiated A&E processes rather than full refinancings to buy themselves time.

So far Keter has so far unsuccessfully tried to extend its current TLB and A&E whispers remain around German lighting supplier SLV and its €397m TLB that is maturing next December.

“If you don't want to be in the queue next year and you're a good name in the mid 90s with a 2024 or 2025 maturity, you might want to get ahead of it now," said a head of credit at a CLO manager, who expects around 10-15 A&E proposals to hit the market early next year.

So far, the sellside has yet to see this activity hit the market.

“We get some enquiries but not so many. There are many more maturities in 2025, and those sponsors are still undecided if they’ll bother with them now or wait. But the main lesson from 2022 is ‘get it out while you can’” added the head of leveraged finance syndicate.

Pan-European foods firm Valeo Foods hit the market with an unusual amendment driven not by an urgent need for funding, but rather the currency mismatch in its debt stack.

Valeo has redenominated a portion of its outstanding sterling 2028 TLB into euros. The company swapped £94.4m of its original £417.5m 2028 TLB into €108.3m at par, having set a maximum cap of £100m. This new incremental euro tranche will become fungible with Valeo’s existing €600m 2028 TLB upon expiry of the current interest period in March 2023. The remaining sterling TLB now sits at £323.3m.

The transaction was a participation, not a consent request, and was wrapped up in under five days, said a source close to the transaction. RBC acted as Solicitation Agent.

Lender reception for the transaction was positive, the source close and a lender said. Although the euro tranche pays a lower coupon than the sterling one (E+400 bps versus L+500 bps at issue respectively), some lenders were keen to move into the more liquid euros, which have been trading at a higher price than the sterling loan. Other lenders remaining in the sterling instrument were long-term returns focused investors looking to stay in the higher-paying instrument, the source added.

Leveraged Loans Secondary

Secondary loan market was green across all industries for the third week in a row. The healthcare and financials sectors saw the biggest price increases, up over 0.6 points on the week.

Bids were due on Thursday at noon on a £52m-equivalent portfolio of mostly secondary loans.

The list offered only eight tickets, and the biggest chunks were three £10m lines — the second lien for BCA Marketplace, and TLBs for Indigocyan and Ethypharm.