Could high-yield bonds tackle the refinancing wall?

Anneken Tappe
08 February 2012

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The wall of refinancing, the burden of LBO debt set to mature in the next two years, is uncomfortably close, leaving the private equity industry to come up with a new structured product to preserve the credit line. But as the industry looks towards the bond market, it becomes clear that it is no panacea either. Anneken Tappe reports

The need to refinance LBO debt due to mature in 2013 and 2014 is becoming a more urgent matter by the day. The bond market gave hope to the private equity industry that a new financial solution had been found to replace collateral loan obligations (CLOs), which had traditionally been used in LBOs.

The high-yield bond market has taken off in loan-oriented Europe in recent months. Rated, liquid bonds and sufficient market size offer for significant advantages over CLOs.

"European high-yield bonds as an asset class have seen a huge influx of cash. The leveraged loan market won't grow much, whereas the bond market will," said a Matthew Sabben-Clare, partner and member of the financing team at Cinven, at the Alternative Investments Conference of the London School of Economics in January.

However, despite this growth, investors should approach with caution. "Bonds are no panacea. There will be hiccups when the market shuts down," the Sabben-Clare warns.

Due to their sensitivity to movements in the market, using high-yield bonds should be considered carefully. Particularly, during the volatile conditions currently caused by Europe's sovereign debt crisis, they hardly seem to offer a sustainable solution.

While high-yield bonds have been a popular tool of buyout houses in the US, the European bond market is that it is by no means equal in terms of both size and depth. Additionally, the much older American leveraged loan market has recovered to a certain extend since the crisis in 08/09, leaving a much smaller gap to fill than in an increasingly strictly regulated Europe.

"Bonds could fill part of the gap left by the declining pool of cash that CLOs can invest in loans," admits the Sabben-Clare.

The private equity industry is facing a dilemma. The wall of refinancing needs to be tackled head on, and high-yield bonds certainly seem to offer a plausible solution. However, the market's inherent volatility is likely to prove problematic for an industry that tends to rely on planning ahead. There is also no guarantee the European sovereign debt crisis will have been resolved by 2013 or even 2014.

Generally, industry experts still seem to believe in the ability of financial engineers to come up with a substitute for CLOs in time before private equity runs into the wall of refinancing.