Originating in the US in the 1970s and debuting in Europe in the late 1990s, the high yield bond market has gone from strength to strength. As banks and traditional mezzanine finance providers retreated from the international leveraged finance space in the aftermath of the Crisis, many private equity funds and corporate borrowers turned to the European debt capital markets to meet their financing needs.
Bonds or Loans?
Although far from a panacea to the market’s demands for debt finance, bonds do offer a range of unique features that have made them particularly attractive to certain classes of issuer. Although bank loans at the top end of the market have increasingly sought to adopt some of the inherent flexibility found in high yield products and the US Term Loan B market, significant differences remain. The table below summarises some of the more significant points an issuer will need to consider when electing whether to raise debt by way of traditional bank finance or a high yield bond issuance.
Will high yield start creeping into the mid-market?
Whilst European high yield has taken a firm grip at the top end of the market, with private equity funds and issuers regularly issuing bonds to finance acquisitions, recapitalisations and refinancings, many have questioned the suitability of high yield for those in the mid and lower tiers of the market. The financial and human resources required to document and market a bond offering, the premium payable by first time issuers and investor demands for liquidity, have led to a commonly held view that an issuance of at least £200 million is required to make high yield a viable option.
Although these barriers to entry have led to a consensus that public high yield is not appropriate for mid-market and lower tier deals, issuers in this space have been able to indirectly capitalise on the popularity of high yield bonds. As traditional lenders and alternative finance providers are pushed into the mid-market in search of deals, competition has increased, pricing has compressed and increasingly more favourable terms are available to issuers. Private high yield products have also started to emerge as realistic options for borrowers lacking the debt capacity of larger credits and private equity funds looking to finance smaller deals. Private high yield can offer issuers a closely held, non-amortising finance solution with the operational flexibility of public high yield instrument, although the illiquid nature of such securities inevitably results in pricing premiums when compared to traditional loans. Ultimately, in deciding on the mix of funding sources to be deployed for any given deal, a balancing act must be performed with each financing solution being carefully tailored to the debt capacity of the issuer and its operational requirements.
From fallen angels to rising stars
This revolution in debt funding owes much to the ‘fallen angels’ identified in the 1970s and the work of Michael Milken and others in the 1980s with ‘rising stars’. Today, high yield bonds account for approximately 70% (€370 billion) of the European leveraged finance market and approximately 60% ($2 trillion) of the US market. With traditional lenders unable to keep pace with the market’s appetite for debt and investors increasingly looking for attractive returns in an economic environment characterised by low interest rates in the investment grade space and stock market volatility, it is unlikely that the pace of growth will ease any time soon.
If you would like to learn more about our experience administering alternate lending vehicles and issuers, please get in touch with me or James Duffield, our Head of Business Development.
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