GBP High Yield Closing the Gap?

The last few weeks has seen healthy issuance in the high yield space, including multiple billion pound deals, the most recent of which, Asda, priced on Wednesday. This was an interesting deal for a few reasons, not least because it is the largest sterling high yield deal of all time.

This transaction has funded the part acquisition of the supermarket chain by the private equity firm TDR and the Issa brothers, who are the owners of EG Group, which in turn has seen a meteoric rise over the last few years aided by aggressive (largely debt funded) growth. With Asda they have acquired an iconic British institution that was previously running with very low levels of debt and with the seller, Walmart, willing to keep a stake. The new owners have been able to re-leverage the business, raising roughly £3.7bn in debt and sell the forecourt business to EG Group, so the cash equity that TDR and the Issa brothers ended up injecting equated to just £780m (Walmart rolled a £500m stake and they also undertook a sale-and-leaseback of Asda warehouses to raise another £950m), or roughly 4% of the total asset base. 

While we expected the acquisition to involve some financial engineering (and we’re sure many would have wished they’d have thought of it first given the result), net debt ended up at a relatively modest £3.5bn (after accounting for related finance leases) against a mainly freehold property portfolio valued at £9bn in October of last year; as a result we expected the bonds to meet strong demand, particularly given the solid corporate ratings (BB at secured level and B+ at unsecured level) and initial price talk. 

The deal closed with a total book size, across the two bond tranches, of over £8bn, which was an impressive job by Barclays and the other banks in the syndicate capturing that interest. However, for us it isn’t just about the size of the demand; it was interesting to see the composition of the investor book across the two tranches, which we think point to certain key trends we are seeing in the high yield market at the moment. 

Firstly, on a proportional basis the book size of the unsecured tranche was much more oversubscribed than the secured tranche; while the secured bond is 4.5x larger than the unsecured bond the demand in the secured book was only 2x larger. This is a trend we have seen in other deals such as recent issues by Ineos Quatro and by Biogroup, both of which saw their subordinated tranches being at least 10x oversubscribed. Also interesting in the Asda deal was that the final pricing saw a sub/senior spread of just 75bps. Although the leverage differential for the two tranches is admittedly small, this points to a general trend whereby we think markets can expect continued compression in the sub/senior spread as investors hunt for yield.

Secondly, Barclays highlighted that there was big demand from investment grade investors who were attracted by the yield for a business that has historically generated solid free cash flow and is seen as having a strong asset backing. Given investment grade spreads are largely approaching all time tights we think IG “tourists” could well prove to be a keen buyer of higher rated high yield over the course of this year. 

Lastly, and maybe most importantly for sterling investors, we were interested to hear of the size of foreign demand for the deal, with 25% of the book coming from non-UK investors. Given completion of a Brexit deal at the back end of last year, a vaccine roll-out that is racing ahead of Europe, and sterling high yield spreads that are still well wide of their European peers (currently around 80bps on an asset swap basis for the same BB- rating), we expect foreign demand for GBP high yield to continue to increase as investors look to try and take advantage of these potential relative value opportunities.