February 7, 2018 / 5:14 PM / 16 days ago

New high-yield reality more clear after Algeco

LONDON, Feb 7 (IFR) - Algeco Scotsman’s challenged trade has come as another reminder of a new high-yield bond market reality where investors are far more price discriminate on risky trades compared to 2017.

Algeco’s trade came on Tuesday with OIDs as low as 94.008 on its unsecured US dollar tranche, with the rest of the tranches clearing around 98, a rarity in the recent high-yield market, offering yields as high as.

The market had already proven to be very price-sensitive on challenging credits, the syndicate banker said, citing the likes of recent deals from German metals group KME, German wind turbine manufacturer Nordex and Swiss vending machine operator Selecta.

Recent yields

“Those deals would have come at tighter prices in a less discriminate market. I think investors are much less willing to chase deals; there’s less of a squeeze for challenging Single B risk,” said the syndicate banker.

Banks provided hard underwriting for the deal, according to two sources familiar with the matter, which means they have to pay the difference when they fail to sell the deal at the coupon level agreed with the company.

Though that implies a funding gap of €39m-equivalent before fees on the transaction, according to IFR calculations, a banker on the deal said this was not the case, bearing in mind that the typical fee on such deals is around 2.5% to 3%.

“They chose to press the button on the worst day of the last 18 months. There was a legitimate reason to wait for things to settle down,” the source said.

All the tranches have traded up in secondary trading, gaining as much as three points, with the euro fixed-rate senior secured notes bid at par, according to the source.

BEARISH AWARENESS?

<<Luke on what if the market gets worse>>

While 53% of deals have been rated Single B and below since the start of 2018, according to IFR data, only 44% of the deals that had priced at this point in 2017 came from those segments of the rating spectrum.

“We think that in light of the tight valuations and the scare from a few idiosyncratic events back in the end of 2017, investors might finally start pushing back on current risk premiums,” Bank of America Merrill Lynch analysts said in a note.

“Technicals remain strong enough to limit the sell-offs, but this gives us one more reason to prefer Double Bs over Single Bs and below, especially given how uncorrelated both segments of HY have become,” they added.

Meanwhile, the equity shake-off pushed the iBoxx euro liquid high-yield index broke the 3% barrier on Tuesday, according to Thomson Reuters data. The index is now yielding 3.01% compared to 1.99% in early November, its tightest level ever.

Still, the outlook still appears relatively bright for well-liked credits, even those that offer a high level of risk. B2/B+ rated French packaging firm Albea’s €150m 6.5NC2 senior holdco pay-if-you-can note, rated CCC+, is currently bid at 101 for a yield of 6.6%, according to Tradeweb data.

Algeco Scotsman did not respond to requests for comment. (Reporting by Yoruk Bahceli)

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