(Repeats story published Friday, with no changes, to reach
* Sterling junk bonds in focus as supply builds
* Debut issuers on the cusp of taking the plunge
* NewDay provides stiff test of demand for LBO paper
By Robert Smith
LONDON, Oct 14 (IFR) - The sterling junk bond market's
resistance to renewed fears over a so-called "hard Brexit" is
about to be put to the test, as bankers ready a slew of deals
from UK issuers.
There are a growing number of debut loan-to-bond and M&A
deals waiting in the wings to test high-yield buyer appetites
for paper. The gaming sector alone could see two such deals in
the coming weeks, as Jackpotjoy plots its debut and Ladbrokes
looks to bring the long-awaited bond backing its merger with
Many in the market were initially surprised how quickly
sterling high-yield bounced back after the UK voted to leave the
European Union in June. Mydentist sold a £425m Single B rated
bond less than a month afterwards, which has been followed by
£1.4bn of supply in September and October.
But the bulk of these deals were bond-to-bond refinancings,
meaning many investors were rolling existing exposures rather
than taking on additional risk.
And the potential supply surge has coincided with a sharp
slide in the value of the pound over concerns that the UK is on
course to exit the single market, meaning bankers are keen to
gauge the appetite for sterling new issues.
"Everyone is interested in the strength of the sterling
demand in high-yield, because while the euro loan market is
happy with covenant-lite, the sterling loan market has been more
selective," said Diarmuid Toomey, head of European high yield
capital markets at Deutsche Bank.
"This means loan-to-bond refinancing is an attractive option
for UK companies."
Demand for such deals is about to be tested, as sources told
IFR that a company in the telecoms, media and technology sector
is on the cusp of launching a sterling bond to take out
"It'll have quite a chunky yield," one person familiar with
the deal said, adding it could be announced on Monday.
Steven Logan, global head of high yield at Aberdeen Asset
Management, said that their funds are not closed to buying
sterling high-yield as long as it is priced appropriately.
"I think it will have its challenges, but I don't think
Brexit will trigger a series of credit events," he said.
"We could see slowing economic growth and more margin
pressure on certain sectors, while immigration controls may
crimp access to cheap labour, but those are longer-term trends."
But while there may be no imminent credit headwinds,
technical factors could still knock demand.
The wild currency swings seen since the Brexit vote can
create additional problems for euro funds holding sterling
bonds, for example, as it creates the potential for losses when
they have to roll foreign exchange hedges.
"If you're a continental investor it's not in your
benchmark, so you don't need to get involved," said Logan.
"People won't want to talk to prospective end-investors
about why they have sterling in their funds when it's
The back-up in Gilt yields has already wreaked havoc on a
number of recent investment-grade deals, with a Gatwick Airport
30-year sold last week now bid at a cash price of just 92.
High-yield is typically a short-duration asset class, so is
less sensitive to these rates moves, but several new issues have
underperformed as supply has built up.
DIFFERENT RISKS, NEWDAY
A slew of recent deals from UK debt purchasers, which buy
defaulted loans looking to profit from collecting on them, have
traded particularly badly. A £350m bond Cabot priced at par to
yield 7.50% on September 29 is now bid at just 96, for example.
"There's a subset of people who love that sector and they're
getting really full," said one fund manager. "When there were
three or four little bonds they were like gold-dust and were
held very tightly, but now the technical is completely
The softening demand for these high-yield financials could
have implications for the underwriters of credit card company
Cinven and CVC Capital Partners are financing the
acquisition with a holding company sterling bond, which sources
said Credit Suisse and Citigroup have underwritten.
A key part of the company's business is issuing store cards
for UK retailers, and one banker away from the deal said it
could suffer if investors are overly wary of exposure to retail.
"You've seen how the high-yield retail sector has reacted,
and this is basically taking a levered bet on the UK consumer,"
"Even if the structure is fantastic and the price is right,
are people willing to take a view on the UK consumer right now?"
(Reporting by Robert Smith; editing by Alex Chambers, Julian