Miller Homes ends Europe's longest junk bond drought since 2009

By Yoruk Bahceli

(Reuters) -British homebuilder Miller Homes raised 815 million pounds in a bond sale on Friday, a lead manager said, but banks had to offer investors a higher yield than originally planned to reopen Europe's junk debt market after its longest hiatus in 13 years.

With a hawkish pivot from the European Central Bank and the invasion of Ukraine sending borrowing costs sharply higher, companies stayed away from the junk new-issue market for more than 10 weeks, the longest market closure since 2009, when the global financial crisis was raging, according to analytics firm Leveraged Commentary and Data.

Miller raised 425 million pounds from a seven-year bond for an 8.25% yield, according to a lead manager memo seen by Reuters, compared to an initial range of mid-to-high 7% offered on Tuesday.

Paying a 7% coupon, the bond priced at a deep discount, at 93.45 cents, the memo said.

A six-year floating rate raised 465 million euros. Paying a coupon of 525 basis points over Euribor, it priced at 97 cents, the memo said, down from an initial 98.

The deal backs Apollo's acquisition of the company from Bridgepoint Group, which was announced in December.

Investment banks were left sitting on around 25 billion euros worth of underwritten deals when the European high-yield and leveraged loan markets shut down in February, according to Refinitiv's LPC. The Miller deal and its discounted pricing highlights the challenges banks will face in selling them to investors.

During the 10-week shutdown, the yield on euro junk bonds rose more than 120 bps to 5%, according to BofA's index, and 20 bps of that rise came after Miller's deal was announced on Monday.

"The (high yield) market is still pretty nervous," said George Curtis, portfolio manager at TwentyFour Asset Management.

"You've still got inflation, you've got rates moving higher, central banks having to act. You've got potentially escalation in terms of Russia-Ukraine, particularly around this gas situation," he said, referring to Moscow's threat to cut off gas supplies to Europe.

LOANS OVER JUNK BONDS

Diarmuid Toomey, head of strategic capital markets at Deutsche Bank, noted there were not many high-yield deals pending.

Instead, most of the underwritten buyout deals in the pipeline are expected to be funded in the loan market, he said, which already reopened in early April.

Leveraged loans have been a preferred avenue of funding this year, outperforming junk debt as their floating-rate payments offer protection from rising interest rates. Demand from collateralised loan obligations also remains robust.

Another avenue is the private debt market, where underwriters are offloading part of the debt backing U.S. private equity firm Clayton, Dubilier & Rice's takeover of UK supermarket Morrisons, Refinitiv's LPC reported.

Issuance is also muted as companies have little appetite to refinance debt after taking advantage of low borrowing costs during the COVID pandemic.

Some investment banks have downgraded their high yield issuance forecasts for this year. JPMorgan expects 90 billion euros, down from 140 billion euros.

The first quarter saw junk bond sales slumping 70% compared to year-ago levels in the euro market, as well as in the much more active U.S. market.

(Reporting by Yoruk Bahceli; editing by Sujata Rao and Paul Simao)