16 May 2016

Spain’s growing appetite for high-yield

Gary Simmons, AFME's Managing Director of High-Yield, argues that for Spanish corporates looking to diversify their funding sources, or in search of longer tenors, a high yield bond issuance may be the answer.

Spain’s corporate sector is one of the most indebted in Europe. During the crisis it gained global notoriety for being uncompetitive (although this was not necessarily the case, the fact being that Spain was simply a net borrower).

Certainly, many Spanish corporates will continue to rely on bank funding – particularly as banks become more competitive and less expensive. However, for those corporates looking to diversify their funding sources, or in search of longer tenors, a high yield bond issuance may be the answer.  

These were among the many themes discussed at a seminar organised by AFME at BBVA’s premises in Madrid in April. Well-attended by banks, investors, lawyers, issuers and financial advisors, the seminar provided an opportunity for market participants to come together to discuss and better understand issues related to high-yield bond issuance in Europe.

Panellists described how the European high yield market has matured into a large, stable source of funding over the past two decades. In particular, Spanish companies have become more active in the last 5 years, not only with respect to issuing high-yield bonds, but with respect to corporate bonds in general.

The Spanish high-yield market really came to prominence post-financial crisis and after the collapse of the securitisation market. Until this point, thousands of Spanish companies had been benefiting from cheap bank funding. But with lending constraints and other factors resulting in banks shrinking their balance-sheets, companies began looking for new sources of financing to restructure their debt, expand or for other general corporate purposes.

As a result, European banks began embracing high-yield bonds and issuance grew from EUR 44.6 billion a year in 2010 to what is nearly a EUR 100 billion market today, according to AFME’s High Yield and Leveraged Loan data report. The principal force behind the increasing relative size of the high-yield bond market was a process known as “disintermediation”. Disintermediation is where businesses in need of funding bypass bank lending and go directly to the capital markets. While the bank to bond shift is now well-established, there is still work to do for Spain to catch up with more sophisticated markets such as the UK, Germany and Italy.

More recently, high-yield issuance volumes have been negatively affected by external factors driving volatility, such as China's economic slowdown, volatile energy and base metal prices and their impact on equity markets, as well as macroeconomic policy events. Fortunately, fresh stimulus measures announced by the ECB and other factors have resulted in an improvement in conditions for the European high yield market.

Bond issuance has some clear advantages over bank funding, such as greater flexibility, longer terms (up to 10 years and even 15 in some cases), and lower collateral requirements. In 2016 we are likely to see more issuers come to market, lower default rates, and a race for yield.

In this respect, Spanish companies have become more opportunistic than ever before. Many now wish to structure their bonds so that they can be combined with loans – balancing the best of both worlds in their funding mix.