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Brexit Delay Rekindles Allure of U.K.'s Junk Bond Market

Laura Benitez
Brexit Delay Rekindles Allure of U.K.'s Junk Bond Market

(Bloomberg) -- Broadband and pay TV provider Virgin Media is the latest company braving the U.K.’s unloved debt market to raise funds following a lengthy delay to Britain’s departure from the European Union.

The company sold 300 million pounds ($390 million) of bonds late on Wednesday as part of a $1.2 billion equivalent deal. On the same day, Co-Operative Group, which provides a range of services from funerals to supermarkets, also sold 300 million pounds of securities, adding to a string of sterling deals since April.

“There’s strong demand for good credits in sterling and the delay in Brexit proceedings has certainly helped overall sentiment around the currency,” said Stephen Smith, a high-yield syndicate manager at Barclays Plc in London, who helped arrange both this week’s sterling sales.

“There is a good opportunity for UK borrowers to print sterling right now.”

Political bickering over the divorce had effectively shut down the sterling market as the risk of economic turmoil if the U.K. left the EU with no deal kept investors away.

These two transactions indicate the market has started to rebound after Brexit was postponed until October. Average yields on sterling junk bonds, an indication of borrowing costs, have fallen below 6% from 8.1% at the start of the year, according to data compiled by Bloomberg.

By the end of the first quarter of 2019, the market had seen just one deal - a 150 million-pound sale from Stonegate Pub Company Ltd. The Co-op had to withdraw an earlier attempt to issue debt, saying last month that "ongoing uncertainties around Brexit” had forced a change of plan.

Divorce Delay

Then in April, EU leaders agreed to postpone their divorce from Britain and that helped trigger a flurry of issuance. Since then companies including bookmaker William Hill Plc and supermarket operator Tesco Plc have sold bonds amounting to around 1.3 billion pounds.But the market revival has its limits, according to Steven Logan, who manages $1.4 billion of bonds as the global head of high yield at Aberdeen Asset Management Plc.

"Frankly, neither Co-Op nor Virgin Media will command any Brexit risk premia in my opinion,” he said. “ Convenience Stores, Funeral Parlours and provision of that must-have utility, broadband, should be well insulated."

Read More: Appetite for Financing U.K. Firms Challenged By Brexit, UBS SaysBrexit Is Said to Cut Access to Sterling, Risking U.K. Deals

Meanwhile, the sterling leveraged-loan market continues to struggle. Banks have committed to just one new-money financing so far in 2019 from U.K. catering business WSH Investments. Manufacturer Berry Global Group started marketing loans in U.S. dollars and euros this week to finance an acquisition, shelving earlier plans to raise some of the money in the U.K. currency.

While banks may still be reluctant to commit to funding sterling denominated financing, so called "best-efforts" transactions -- where banks are not on the hook should the deal not sell -- are seen as a safer bet. But even these sales have dropped by over 60 percent this year to 1.5 billion pounds, according to data compiled by Bloomberg.

Other Routes

Companies have found other routes to raise financing to beat the uncertainty from Brexit. Aston Martin sold $190 million of notes in a private deal last month. Meanwhile, Jaguar Land Rover in February said conditions were too tough to access the market and Victoria Plc shelved a planned deal late last year citing expensive funding costs.

But greater optimism around sterling has prompted several issuers to line up sterling transactions for the coming weeks, according to Jeremy Duffy, a partner at law firm White & Case specializing in bank finance.

"We’re seeing several UK companies considering the debt markets again as sentiment around sterling has improved and borrowing costs are relatively attractive," he said.

To contact the reporter on this story: Laura Benitez in London at lbenitez1@bloomberg.net

To contact the editors responsible for this story: Vivianne Rodrigues at vrodrigues3@bloomberg.net, Chris Vellacott

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