LONDON, Dec 20(IFR) - The junk segment of the sterling corporate bond market is leaving behind a record year despite a series of headlines casting a shadow over the future of the UK’s economy and currency.
Issuance of sterling-denominated high-yield bonds in 2017 reached £8.66bn, its highest level ever, according to IFR data.
“It was astonishing given the concerns around Brexit and consumer spending,” one DCM head said. The irony was that consumer names were a key component of supply.
Despite the Brexit process expected to bring more noise in 2018, expectations are that the sterling market will remain resilient.
One of the first sterling deals of the year will come from Pure Gym, according to sources, to back its acquisition by Leonard Green & Partners.
“It’s hard to say it will be as busy as this year, but we’re certainly aware that sterling supply will be in the market next year,” a syndicate banker said, given how high volumes have been this year.
Uncertainties around the Brexit process and currency moves are unlikely to tamper appetite for sterling paper.
“The UK institutional investor base is probably as big a driver of the sterling issuance we’ve seen this year as the comparative investor from Europe,” said Eden Riche, head of high-yield and emerging markets syndicate at ING.
“For this latter group even if the currency view becomes negative and they drop away, I still think you’ll see a high level of resilience in the sterling high-yield market from the domestic investor.”
That political noise did not derail the market in 2017 was most evident when six of the year’s 26 deals were announced between the UK general election announcement in mid-April and the vote in June, raising just over £2bn of the year’s volumes.
“There was a window prior to the election that people took advantage of, though the demand for sterling paper didn’t reduce meaningfully afterwards,” the syndicate banker said. Another £4.3bn priced after the election.
Sterling volumes added to a booming year of issuance in the European market more broadly with 10% its growth a result of the resurgence of the sterling market, according Barclays’ data.
Returns were the key appeal of sterling paper to yield-starved bond investors.
In cross-currency transactions that included sterling tranches, the latter offered 79.5bp of additional spread on average to investors compared to euro or US dollar tranches of the same or longer maturities, according to IFR data.
ING’s Riche said this was part of the appeal for investors hunting for returns to meet their targets.
“It’s because they can’t get anything else that’s reasonable,” he said.
“They are basically doing what the Americans and Europeans have been doing, becoming high-yield tourists.”
In the cases of carmaker Jaguar Land Rover, which printed a four-year sterling deal one week after selling a seven-year euro note and AMC Entertainment, which brought a sterling and US dollar offering, the sterling notes still offered higher spread despite significantly shorter maturities.
This was also reflected in the secondary market.
Stephen Baines, investment manager at Kames Capital, said the spread differential in the secondary market has been brought about by the drive to avoid Brexit-related risks.
“We believe this valuation disparity has occurred because top-down investors, in their desire to avoid Brexit-related risks, have sold down sterling-denominated assets without considering the credit quality of the underlying borrowers or the valuations of the particular bond issues,” Baines wrote in a recent note.
However, despite a record year, several issuers struggled to push through aggressive structures that have become more commonplace in euro deals.
Budget supermarket Iceland and online retailer and credit provider Shop Direct had to cut down offerings - the former a 10-year tranche and the latter a floater and dividend payment - when investors pushed back on aggressive pricing in the case of Iceland and an aggressive use of proceeds and uncertain business model in the case of Shop Direct.
“Investors are more selective on sterling compared to euros, because the buyer base is smaller and fairly disciplined on pricing,” the syndicate banker said.
He added that this was particularly the case for Single B issuers and consumer names, such as Iceland and Shop Direct, where investors are showing more willingness to choose between stronger versus storied credits. (Reporting by Yoruk Bahceli, editing by Helene Durand, Sudip Roy)