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Testing the water: issuers gauge sterling HY bond demand following 10-year record low

Pure Gym, a UK-based fitness club, has become the second company in a week to test demand for sterling-denominated senior secured notes (SSNs) in the European high-yield (HY) market. The firm previously announced a minimum GBP 300m sterling-denominated note on its dual-tranche deal, but ended up hiking this to GBP 475m (EUR 546.6m-equiv), pricing at 10% (versus 8.25% for the euro-denominated slice). In contrast, the concurrent euro tranche was only upsized to EUR 380m from its initial EUR 300m minimum, suggesting the sterling portion found favour with investors. Last week, Worldpay, a US-based software-financial technology group, placed GBP 600m SSNs at 8.5%, which performed well on the break in the secondary.

These two deals are only the fourth and fifth sterling-denominated HY bonds to be publicly syndicated so far this year, following Ford Credit (EUR 566m-equiv in February), [A1] TVL Finance (EUR 374m-equiv in April), and Iceland (EUR 308m-equiv in July).

While activity has been subdued in 2023, issuance volume has already overtaken last year’s total, when five deals were printed (EUR 1.9bn-equiv), four of them in January and the fifth in May. Against a volatile backdrop, the UK economy has been buffeted by the impact of Russia’s war in Ukraine on retail and energy prices, soaring interest rates, and a mini-budget crisis under former Prime Minister Liz Truss’ ill-fated 49 days in office, manifesting in sterling losing ground in the HY market.

Long way to go

September’s EUR 1.24bn-equiv issuance may offer signs of a market revival given it is the highest amount printed in 20 months. However, much more will be needed to return sterling-denominated paper to previous historical levels.

The lull in issuance between late April 2022 and February 2023, in tandem with a weak post-pandemic recovery, means sterling-denominated printing has been at its lowest since 2014.

The advent of Russia’s invasion of Ukraine, rampant inflation and surging interest rates have had a significant impact on the European market in general. Waning primary issuance has hit sterling-denominated paper, but the numbers have been particularly insipid even taking into account the difficulties in leveraged finance primary issuance. Debtwire data show that the market has been harder on sterling-denominated HY paper than euro-denominated releases.

Sterling suffering

Among other explanations for the slide in sterling issuance is the fact that UK-based companies have not been coming to the market as they did previously. Yet, even within the UK economy, sterling-denominated HY bonds have lost ground. Debtwire data show that sterling bonds made up on average 53% of UK issuance between 2015 and 2022. But this plunged to its lowest level in a decade, reaching only 20% of notes printed in the country in the 12 months ending in June. Indeed, the decline shows how far sterling has got to go before it recovers in the HY bond market.