Frankfurt/London, 22September 2011: Although the new issues market for European high yield bonds has been affected by the general debt market turbulence of the last few weeks, the last two years show the increasing significance of this form of funding in capital structures, either replacing or complementing conventional bank loan funding.
The terms of High Yield Bond issues continue to develop, the covenant packages often being negotiated in great detail (and sometimes more so than in the US HYB market), particularly in the case of private equity sponsor-driven issues. The European covenant package is far from being cookie-cutter and refinements in the note holders’ put option on change of control, the flexibility of the issuer group to incur other debt, the pari passu sharing of collateral for the HYB with other creditors (including bank loan lenders) and the growth of a super-priority strip of debt ranking ahead of the HYB continue to develop. Overall, the protections for the High Yield Bond investors are going through a period of being tested and pushed by issuers to explore what the market will bear.
Xtract Europe’s European Managing Director and Senior European Covenant Analyst James Slessenger commented: The European High Yield bond market is clearly here to stay in the medium- to long-term and continues to evolve. There are many detailed variations that are developing, almost on an issue-by-issue basis, and so it is not true to say that the covenant package is standardised across the board. Investor protections generally are being whittled away, sometimes obviously and sometimes by more subtle nuances, and these have a real potential impact for investors. I have no doubt that, when the market revives, this process will continue.