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Chris Haffenden

The sharp sell-off in European LevFin debt prices — seen since late May — accelerated into the second half of June, as recession fears grew with Russia set to cut off gas supplies to Europe. Over the past month, an incredible 773 bonds have moved by more than 5% or more, and 229 by more than 10%, and 40 by more than 15%.

Despite seemingly attractive prices, investors are exiting HY at a record rate, with the largest outflow from European Corporate HY funds last week since March 2020, with around 17% of AUM leaving the market year-to-date, according to Credit Suisse.

We’ve ended the month with the iTraxx Crossover at 580bps (it traded over 600 at one point yesterday) and the European LevLoan Index is now at 90.

Our first report issued on 15 June took a stab at estimating the extent of stress and distress in European LevFin. We showed how 9fin’s bond and loan screeners can help funds and advisors locate opportunities and detect moves. Every two weeks we will update our findings, focusing on new entrants, biggest movers and the latest events and the news flow behind them.

With 783 bonds from 360 issuers trading at a price below 90 at end-June (up from 648 and 310 two weeks ago) it is clear that other metrics must be used to identify stress and distress. We believe spread to worst (STW) is a more appropriate measure, using over 800bps as stressed and over 1200bps as distressed.

But even on that basis, a significant number of EHY issues and issuers are now trading at stressed and distressed levels. We now have 302 bonds from 188 companies above 8% STW (an increase of 135 bonds and 72 issuers from just two weeks ago). Our total bond universe is 1,493 issuers from 553 borrowers, meaning that one-in-five (20.5%) are stressed/distressed.

NB the data is from 1 July, our ‘Europe’ Region data includes issuance from reverse yankees.

Breaking this down further into stressed and distressed — we now have 211 bonds as stressed (800-1199bps STW) from 133 issuers — this is up from 106 bonds from 78 issuers two weeks ago. For further comparison, we had 49 stressed issuers in mid-March, therefore another 84 names have entered into stress in just over three months.

A number of interesting names have entered into the stressed universe, including names which a few months ago would have been solid credits. One interesting observation is that many more names from the top of the cap stack are offering close to or above double-digit yields. Examples include ASDA £SSNs yielding 10.77%, Miller Homes launched just six weeks ago at 8.25% YTM, and now yielding over 11%. Nobian is another inclusion, offering an impressive 970bps STW – exactly a year ago it was launched with a 3.625% coupon, ah heady days.

In total we have 93 bonds under our European coverage as distressed (over 1200bps STW) from 65 issuers. This is up from 61 bonds and 44 companies, just a fortnight ago. The number of distressed issuers has more than doubled since mid-March (32 issuers).

Notable new entrants into distressed include a number of Cruise operators, in particular Carnival — a prior market darling, whose issuance of senior notes at 7.625% in dollars and euros in November 2020 raised plenty of eyebrows at the time. The notes traded as high as 111 last summer, but are now trading with a 78-handle, yielding in the mid-teens. It is joined by Hurtigruten, 12x levered on its pre-covid EBITDA and with maturities next June, and TUI Cruises a mere 50x levered, in the low 70s. The market is waking up to the fact that growing into their debt-funded bloated capital structures (to bridge to reopening) will not be plain sailing.

We have 36 senior secured notes in the distressed category — notable names include Consolis; Adler Pelzer; Ideal Standard; Novafives; Iceland and Douglas.

Filtering further, we have 10 SSNs from nine issuers with Net Leverage (IFRS 16) below 5x.

Clearly the market is not giving the benefit of the doubt to restructuring candidates such as Takko, Maxeda and Adler Pelzer, despite decent recent trading.

If we determine stress/distress at less than 90 price — we have 18 FRNs from 16 issuers which have fallen by more than 5% in the past month.

Not unsurprisingly, Takko and SBB (Viceroy short-seller allegations) top the list here.

Moving over to Leveraged loans — 225 loans trade between 85 and 92 — our view of stressed. Over the past month, 71 stressed loans have fallen by more than five points.

Biggest movers over the past month are below — notable names include Xella, Arxada (Lonza), Wella and BioGroup — whose CEO was sadly found dead in a hotel room.

A further 68 loans are distressed (sub 85).

We note there is a large food component to our list, with a distinct French flavour. You can further filter moves by industry via our screeners.

Over the past week or so, there has been some signs of stabilisation at lower levels for some of the names.

But looking over a longer-term horizon — the moves over a month’s horizon are a lot bigger.

To illustrate the magnitude of the recent sell-off in European HY bonds, in the past week, 53 bonds fell by more than 5%. Notable fallers include Takko, Peach Property Group, DIC Asset (German RE contagion) — but also jumbo deals such as Morrisons whose 4.75% 2027 SSNs are now sub-80 after falling 8% in past seven days.

Over the past month, an incredible 773 bonds have moved by more than 5% or more, and 229 by more than 10%, and 40 by more than 15%. Some of the biggest movers are below.

News driven events include — Matalan bondholders appointing advisors on refinancing worries; SBB under pressure as Viceroy details further accounting allegations; Takko releasing poor results; and Corestate appointing advisors to deal with an upcoming maturity wall.

Amid all the doom and gloom, 61 bonds managed to show some gains in the past month — including some distressed issuers such as Orpea (our latest research is here); Aggregate Holdings and Veon — but just 18 bonds rose by more than 2% .

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