Daisy pulls sterling junk bond as investors get tough

By Robert Smith

LONDON, Oct (HKSE: 3366-OL.HK - news) 21 (IFR) - Daisy called off an attempt to issue a sterling high-yield deal on Friday, in the latest sign of waning UK investor appetite for riskier debt in challenging sectors.

The UK company threw in the towel on the debut bond after four days of marketing the B2/B rated £385m fixed and floating-rate notes, as cautious investors demand higher yields than the telecoms and IT services firm was willing to pay.

While growing concerns around the likelihood of a so-called "hard Brexit" have made sterling deals more challenging, the European high-yield market has seen a growing resistance to riskier deals in any currency.

France's Verallia pulled a 500m PIK dividend deal last week for example, after investors objected to its structure and aggressive use of proceeds.

Leads began whispering Daisy's fixed-rate tranche at 8.50% area, but by Friday investors demanded wider yields than the company was willing to pay, according to a lead banker.

"We had a deal there at 8.75-9%," he said. "But their current debt stack (costs) 6.8%, so a new deal at 8.50% was already stretching the elastic for them."

Daisy also sounded out investors on a bond in late 2014. JP Morgan (Other OTC: MGHL - news) arranged the meetings although a deal never came to fruition.

"There's a real business here, don't get me wrong, but it's one that's tricky for a number of reasons," an investor told IFR on Thursday.

"Brexit is happening sure, but that's not my main concern. This is a business model that needs to make acquisitions to stand still. And I think there are very low barriers to entry."

Daisy sells converged telecom and IT services to small and medium sized businesses, and has acquired a number of competitors in recent years to grow its business. The bond's covenants would have given it capacity to incur additional debt to fund planned future acquisitions, with management guiding for two-to-three M&A deals a year, according to investors that attended the roadshow.

The banker said that this acquisitive business model meant some raised concerns around the difficulty distinguishing between organic and inorganic growth in the company's accounts.

"If they get a little bit more operating performance and are able to clarify their growth figures a bit more, I think there's a deal to be done at a better price in future," he said.

STERLING STRUGGLE

This the latest sign of slackening demand for sterling high-yield bonds. A slew of recent deals from UK debt purchasers, which buy defaulted loans looking to profit from collecting on them, have traded particularly badly.

The banker said that while renewed worries around Brexit may have made some investors more reticent to buy Daisy's deal, the biggest issue for many was a hefty pipeline of expected deals from UK issuers.

These include several M&A financings, with Ladbrokes (LSE: LAD.L - news) and NewDay both eyeing sizeable deals in sterling.

A banker away from the deal said Daisy's failure to launch was also indicative of an increasingly two-speed market for high-yield debt.

"Straightforward credits are pricing extremely well, while tricky credits aren't," he said. "People are assigning a material credit premium to challenging stories."

This has not deterred other companies in challenging sectors from looking to tap the high-yield market, however.

Spanish gaming company Codere on Friday announced plans to issue a 775m-equivalent deal in euros and dollars, having sounded out investors during "credit update" meetings earlier this month.

The company emerged from a messy restructuring in April after a multi-year stand-off with creditors and has substantial exposure to emerging markets such as Argentina. (Reporting by Robert Smith, editing by Alex Chambers)