High-yield remains attractive despite sell-off
Despite a sell-off that has slowed the red-hot run of the European high-yield market, a long-lasting correction does not appear to be on the horizon.
Recent underperformers are starting to recover, while the iTraxx Crossover was trading tighter on Thursday after a decent bout of widening over the past 10 days.
The index was bid around 243bp, compared to 249bp at Wednesday’s close, according to Tradeweb, having traded at 223bp on November 6.
The weaker backdrop was driven by several underperforming credits, including Netherlands-listed telecom Altice, Italian construction firm Astaldi, British chicken producer Boparan and retailer New Look.
Altice traded down after its chief executive was ousted following weaker-than-expected quarterly results and cautious full-year targets, while Astaldi reported a loss due to a writedown of its Venezuelan assets and announced a capital raise and plans to raise further debt. New Look and Boparan also reported heavy losses in their earnings.
“It’s not that the challenges are unique or different, but it’s the way the market has reacted to those challenges, perhaps more so than other times,” one portfolio manager said.
He suggested the timing may be a reflection of how much the market has tightened.
But with no single reason behind the sell-off and yields coming off historically low levels, the market remains attractive.
“While idiosyncratic risk factors remain, market fundamentals continue to be very strong,” analysts from Lucror Analytics wrote in a note.
While the iBoxx euro liquid high-yield index has gapped out by 51bp since November 6 to 2.61% at Wednesday’s close, it is still far lower than the 5.12% level at the start of 2016, according to Thomson Reuters data.
“I don’t see wide levels. We’re just back to where we were in September, which was the best ever market we had,” one syndicate banker said.
RISK APPETITE IN PLACE
Unlike the US market, where three deals were pulled in the space of a week, European issuers managed to push their trades through with minimal adjustments to pricing. Dealflow included the largest Triple C offering in the history of the market.
Swedish alarms company Verisure did widen pricing on a dual-tranche offering to 5.75% and 575bp over Stibor, respectively, from low-to-mid 5s shown to investors in pre-sounding last week. But it did raise €1.145bn-equivalent in the process.
It was a clear demonstration that investors are still willing to take on risk in their hunt for yield.
Proceeds from the deal, alongside a term loan, are being used to pay a €1.05bn dividend to sponsors Hellman & Friedman, and the deal got done despite a term paving the way for it to pay a further dividend when it delevers.
A day earlier, Swiss telecom Salt managed to bring a €400m 10NC5 senior secured note at 4%, far inside the 4.31% level that UPC’s €635m 3.875% senior unsecured 12NC5, a main comparable, was trading prior to the deal pricing, according to Tradeweb data.
Still, the portfolio manager said that deals may not have crossed the line as easily had they come from more distressed names.
Investors have long complained that prices have become too tight, and the sell-off raised hopes for some that yields would return to more appropriate levels.
“We believe that valuations were too tight, and the latest market correction could reflect a normalisation,” Lucror’s analysts wrote in the note.
While no high-yield bonds in euros priced at 2% or below in 2016, 11 have managed to do so this year, according to IFR data, a demonstration of just how far the market has tightened.
“Should high-yield deals really be pricing inside 2%? That probably doesn’t make a lot of sense,” said the first banker.
But with investors cash-rich, the technicals remain supportive.
“The market has rallied quite hard today, so it might not be that long-lasting,” the portfolio manager said.
November 17, 2017, 01:07:00GMT
By Yoruk Bahceli; Editing by Sudip Roy and Philip Wright