Just how healthy is the consumer?
European high yield supply has endured its weakest start to a year in over a decade. The total supply to May 13th equalled €12.89bn, a fall of 75% year on year, with the market effectively closed for a large portion of the year.
The lack of supply is unsurprising, given the elevated level of volatility we have seen in the first five months of 2022. Moreover, after a very strong 2021, many companies refinanced their upcoming maturities and extended maturity profiles. As a result, the absolute level of debt maturing over the next two years is low (as we mentioned on a blog last week).
While we do not expect the supply "drought" to turn into a supply "flood", we do expect supply to begin trickling to the market more regularly. Initially, new issuance supply is usually driven by higher quality names testing the water, and this year has been no exception.
For example, last week, Elis (a France-based business services company) issued a €300m Senior Unsecured bond. Rated Ba2/BB+, the bond was marketed initially with a price of 4.875% before meeting significant demand and tightening by 62.5bp to 4.25%. To put that into context, in September last year, Elis priced a €200m "add-on" to an existing 2028 maturity deal at a yield of just 1.6%. Elis are now paying 100bp more than the yield on the single B index when they tapped the market last year, so we can understand why the order book was 10x oversubscribed.
Aside from more traditional refinancing, we also see potential for LBO deals, given private equity investors have remained active throughout the present period of volatility. For example, in the last few weeks, KKR announced the acquisition of Countor Global, while rumours of CD&R purchasing Atalian Servest have surfaced. Likewise, Ontex, Banijay and Ellaktor are all subject to similar speculation.
Ultimately, we expect investors to remain disciplined when looking at new issues. However, Elis' recent deal proves demand exists for higher quality paper, given yields are, in some places, significantly above long term averages. While volatility will remain elevated, we are confident that investors can generate solid returns over a medium to long term time horizon, given the attractive yields available for high-quality borrowers. Indeed, the 10x oversubscription book on the Elis deal suggests that we are not alone in this view.