Bond managers have welcomed a series of European high yield ‘megadeals' offering a cheaper alternative to typical issuance.
On 23 April, the French cable unit Numericable and its main shareholder Altice raised €7.9bn in the largest European high yield deal ever.
That followed €3.75bn of high yield issuance from Italian telecom firm Wind on 4 April.
Henderson Global Investors Strategic Bond fund co-manager John Pattullo (pictured) has been cutting exposure to high yield, but said such deals represented an exception in terms of attractive prices and low default risk.
“Exceptional deals represent large businesses, and generally that means they need to come to the market offering a good rate," he said.
A number of bond fund managers have questioned the prospects for high yield in recent months; Psigma’s Tom Becket, for instance, said he had identified signs of “the dirty elements of the credit bubble”.
However, managers buying the megadeals attributed such issuance to structural changes in the telecoms market, as Europe’s fragmented companies attempt to consolidate.
Aviva Investors Strategic Bond fund lead manager Chris Higham has bought both Numericable and Wind debt. He said the Numericable deal, in particular, looks strong: “They are raising a lot of equity, but they are also buying the second largest French mobile phone company, which is a strong business.”
Schroder Monthly High Income co-manager Michael Scott has also bought debt in both these issuances. He said Numericable is priced 100bp behind its nearest market comparable and, in his view, is 50bps cheaper than its fundamental value:
“From our point of view this is a cheap deal. These large deals have to be priced attractively in order to get traction in the market," he said.
High yield continues to hold opportunities compared to other fixed income classes, he added.
There are also additional benefits to the largest deals. They are typically more likely to include credit derivative contracts, which give managers the opportunity to hedge out exposure in the future.
Roughly €83bn of European high yield debt was issued in the primary market in 2013, of which 38% was from first-time issuers, according to Credit Suisse. The euro high yield market is worth €370bn, compared to just €77bn in 2007.
A March report from T.Rowe Price argued this growth is not a cyclical trend, but represents companies turning to the bond market rather than banks: “The market’s growth is expected to be sustainable over the long-term based on a structural change in how Europe is financing its corporates.”
