Verisure prises open European junk bond market

Europe’s high-yield bond market saw signs of life on Thursday, as a Swedish alarms maker became the first lower-rated company to raise euro debt since coronavirus-related lockdowns took hold across the continent.

Verisure, whose biggest shareholder is US private equity fund Hellman & Friedman, priced €200m of bonds with a single B credit rating, several notches below investment grade. The home security company, which increased the size of the deal by €50m on the back of strong demand, told investors it was raising the money to pay down a line of credit from banks.

Europe’s investment-grade bond markets have recently broken records for issuance volumes, with more than €40bn of new deals in a week for the first time earlier this month. The rush reflects companies with solid balance sheets bolstering them further to ride out the impact of the Covid-19 pandemic.

But Verisure’s relatively small deal on Thursday was the first new deal in Europe’s high-yield market in about two months. The leveraged loans market — where lowly-rated companies obtain credit — has been similarly subdued. 

In contrast, the US has experienced a rush of racier debt deals in recent weeks from companies in the eye of the storm of the coronavirus crisis. 

Hotel chain Marriott tapped the bond market this week, while earlier this month Texan billionaire Tilman Fertitta raised debt backing his casino and restaurant empire at more than 14 per cent — the highest interest rate ever seen in the US leveraged loan market.

The dearth of supply in Europe comes despite the lower interest rates available to borrowers. The average yield of the ICE BofA European high-yield index is less than 6 per cent, on contrast to 8 per cent on the US equivalent. 

Azhar Hussain, head of global credit at Royal London Asset Management, said the European market tends to move more slowly than its US equivalent because of its smaller size and “non-dedicated” base of investors.

“But it’s been a real surprise not to see European issuers taking advantage of the tightening of credit spreads,” he added. “There are plenty that need the capital and they should be using this opportunity to take it.”

Bankers and investors said the lower volume of bond sales partly reflected a greater willingness by European banks to lend to established companies with junk credit ratings. French car parts manufacturer Faurecia, rated BB+, was able to raise €800m from domestic banks last week, for example.

Verisure priced its new bond deal, which was led by JPMorgan, at an annual interest rate of 5 percentage points over a floating-rate benchmark. This floating-rate feature meant investors that typically buy riskier loans, rather than bonds, also invested in the offering.

While Verisure carries high leverage, with its more than €5bn of debt equating to nearly 7 times its adjusted earnings, it has a strong recurring revenue base from its alarms installed in homes across Europe. It also saw little pressure on its revenues during the last financial crisis.

The company has raised debt to pay its owners a dividend twice in the past three years. The €1bn of cash it returned to shareholders in 2017 marked one of the largest “dividend recapitalisation” deals in Europe since the 2008-09 financial crisis.