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#Investments — 19.02.2016

High Yield Bonds: How Some Issuers Are Reassuring Investors!

Thierry Trigo

Faced with serious operational difficulties, some renowned issuers on the Euro High Yield market have found the means to generate cash. This is positive news for the Euro High Yield market as a whole.

Who are these issuers and why had they to react?

The bond prices of some issuers, such as ArcelorMittal, Abengoa, Areva, Rallye, Vallourec, Nyrstar, CGG and Repsol were under pressure because of embedded financial difficulties on the one hand (fall in their operational cash flows, cash burn, higher leverage, etc.) and bonds to be redeemed in 2016 or at the beginning of 2017 on the other hand. In short, these issuers risked not having enough cash merely to redeem their bonds arriving at maturity. They could not raise funds by issuing new, longer-dated bonds because of the prevailing high volatility on the High Yield bond market. Finally, further bank support was not easy to obtain given the equity capital constraints imposed on banks and the still negative outlook for certain sectors (oil, steel, etc.).

Is the gloomy prospect of default avoidable for these industrial groups? Probably.


Appropriate measures taken to generate the liquidity they lack

As their results publication is approaching, these groups’ management teams have issued statements to reassure the bondholders. The measures announced should be efficient - so these issuers’ ratings should not be further downgraded - but most of them still need to be implemented. The main initiatives are:

  • Disposal of non-core businesses: Nyrstar (all its mining activities), Vallourec (worldwide industrial reorganisation), Repsol, Areva (sale of Areva NP to EDF), CGG (reduction in its fleet of seismic survey vessels), Rallye (downsizing of its investment portfolio), Abengoa (biofuel activities, shareholding in the solar plant Shams-1), ArcelorMittal (shareholding in Gestamp for USD 1bn).
  • Capital increase: Vallourec (French state and Japanese industrial group), Areva (recapitalisation by the French state), Nyrstar (capital raised by EUR 274M), CGG (capital raised by EUR 350M), ArcelorMittal (USD 3bn planned).
  • Acceleration in synergies following a recent acquisition: Repsol (following its acquisition of Talisman in 2015).
  • Significant cut in capex: Repsol, ArcelorMittal.
  • Suspension of share dividend payments: ArcelorMittal.
  • Debt restructuring: Abengoa (bondholders are likely to write off 60% to 80% of losses).
  • Banking support: CGG (more flexible bank covenants because of the capital increase realised), Abengoa (new credit lines if its viability plan is approved).

Contrary to what markets were recently expecting, the worst is never certain. The impact of these measures on the prices of the bonds concerned was positive. But will all these measures suffice?

It is possible that other efforts will be announced by the managing teams of those groups still under pressure (capital increases, dividend cuts, etc.). Investor confidence needs to be consolidated.  But the oil price also needs to level out and the globally negative sentiment regarding worldwide growth needs to wane so that such issuers can raise money on the bond market when needed as they did before the current crisis.


Companies cited

Nyrstar: Belgian industrial group in metal recycling and smelting

Repsol: Spanish oil company

Areva: French group specialising in nuclear power activities

CGG: French company specialising in sub-surface exploration

Rallye: Financial holding of Casino Guichard Perrachon

Abengoa: Spanish industrial group in the energy sector

ArcelorMittal: Luxembourg steel group, the world’s leading steel manufacturer

Vallourec: French group, world leader in the manufacture of seamless steel tubes for energy and industry