Funding fallen angels
As traditional bank financing fades away, new sources of funding are becoming available to CFOs across Europe. High-yield investors, in particular, are taking an interest in companies they had shunned before. But with choice comes complexity, so structuring a company’s financials is becoming increasingly complicated.
When Ciech, a Polish chemical company with annual turnover of PLN 4.4 billion (EUR 1.1bn), refinanced its bank debt with an international high-yield bond at the end of last year, it was widely recognised as emblematic of a major trend. High-yield bonds have become wildly popular. Companies across western Europe, and even in emerging Europe, can benefit from this as high-yield spreads over government debt have compressed to multi-year lows.
According to the Institute of International Finance (IIF), European high-yield spreads currently stand at just above 500 basis points, down from 1,000 at the beginning of 2012. The IIF does not want to call it a bubble, but writes that the spread compression “has raised the question of whether credit risk is being under-priced again, as in the period prior to the 2007-09 financial crisis.” But the frenzy in the high-yield markets continues. According to data from Thomson Reuters, the volume of international bonds issued by European companies in the first six weeks of the year was down 19 percent compared to the same period last year – but up by 55 percent in the high-yield market. As a chemicals company, Ciech would not normally be considered interesting by international high-yield investors.
Traditionally, they look for high-tech companies, telecoms and the like. But European high-yield markets no longer behave like they used to. “Before 2009, high-yield in Europe was used predominantly by private equity investors as subordinate elements of a larger financing structure,” says Fabio Diminich of Clifford Chance, an international law firm that advised Ciech on the deal. “Today, more companies use the high-yield market and for bigger parts of their overall capital structure. It now often makes up a big chunk of the senior debt.”
The local bond that Ciech issued, worth PLN 320 million, was due to mature in December 2012 and the company prepared to refinance it with another local bond the summer before. But early on, it became apparent that as investors were showing heightened interest in European high-yield bonds, CFO Andrzej Kopec could do more than just refinance the local bond. It turned out he could also replace the best part of its bank credit facility with a euro-denominated high-yield bond.
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