Issuer friendly market situation for high-yield bonds
Issuing a high-yield bond is a worthwhile option for non-investment grade companies seeking to raise their debt capital. 2014 has been another record-breaking year in the high-yield market.
Text Leena Koskenlaakso
Photos Marjo Tynkkynen/Otavamedia, Anton Sucksdorff
BORENIUS FINLAND – “Today, a growing number of non-investment grade companies are issuing high-yield bonds as a normal part of their borrowing strategies. Demand for their bond offerings is created by investors searching for higher yields in the current low interest rate environment,” says Juha Koponen, Partner and Head of Capital Markets at Borenius.
“From an international perspective and in terms of volume, 2014 has been another record-breaking year on the high-yield market. European volumes will comfortably exceed the 2013 numbers, getting well in excess of EUR 70 billion in total. This is reflective of an issuer friendly market,” says Harri Sundvik, Vice-Chairman of the Nordic investment banking team for Bank of America Merrill Lynch.
He believes the increased Nordic activity is all about high-yield bonds becoming an important and normal tool in the overall strategy for debt capital raising for Nordic and Finnish companies.
“Putting aside the smaller issues, which have been placed in the local markets, the Nordic high-yield bond issuers have simply recognised the strategic importance of diversifying their funding sources,” Sundvik notes.
The higher the risk, the greater the volatility
The Finnish high-yield market opened in 2014.
“Close to half of the approximately 40 corporate bonds issued in Finland in 2014 belonged to the high-yield category. The total amount of Finnish corporate bonds in 2014 was EUR 4.5 billion. In 2013 the volume of the corporate bond market reached roughly EUR 6 billion, with 45 individual transactions,” says Antti Saha, Director and head of the non-investment grade corporate debt team at Nordea Investment Banking.
According to Saha, the high-risk investment market is more susceptible to rapid changes.
“The higher the risk, the greater the volatility.”
He says late summer and early autumn 2014 saw some volatility and turbulence, but during November there was a strong rising trend, and by early December the high-yield market had bounced back.
“Similar developments took place on the stock market, as correlation between the two is usually strong.”
More expensive than a bank loan
“Bond funding is typically more expensive than a bank loan. That is why companies issuing a high-yield bond must have not only a need for debt capital, but also a solid financial position that enables taking of debt,” Saha points out.
“But the terms of high-yield bonds are more flexible than those of bank loans,” claims Koponen, who has been involved in the issuance of six high-yield bond offerings by both private and publicly listed Finnish companies.
“If you take a bank loan, the bank controls and tests you regularly, expecting you to submit reports every quarter, whereas with a high-yield bond you do not need to ask for a permission for every move you make. High-yield bonds provide more leeway for chief financial officers,” Koponen suggests.
“It is also important to recognise that the rating process is no longer seen as such a labour intensive monster it used to be some years back,” Sundvik reminds. “Progress in the standardisation of documentation and key terms has made it more comfortable for companies to use the high-yield market.”
The rating process is usually required for the larger issuances where the high-yield bond is sold predominantly to foreign investors.
Positive market outlook for 2015
“As far as we can see now, the favourable market conditions are expected to continue. At the same time it would be brave to predict further improvement, given the already very favourable conditions for issuers. No doubt some macro scale or political news or surprises can cause some rethinking in this market from time to time,” says Sundvik.
Also Saha believes the road ahead is relatively stable.
“No strong growth in sight, but no significant decline either.”
Koponen expects to see renewed activity on the high-yield market towards the end of the first quarter of 2015, when companies start to rearrange their financing.
- A debt security rated below BBB-/Baa3.
- The issuer is considered more likely to have payment difficulties or other adverse credit events.
- From the investor’s perspective, the higher interest rate and stricter terms compensate for the risks involved.
- Typically, there is a strong correlation between the behaviour of high-yield bonds and the stock market.
Investment grade bond
- Best possible credit rating, rated BBB-/Baa3 or above.
- Lower interest rate owing to smaller risk of payment difficulties or adverse credit events.
Contact the Capital Markets team at Borenius (Finland)
Read more about high-yield bond offerings: How to orchestrate a EUR 430 million high-yield bond offering in eight weeks