High-yield bond issuance: how to avoid 5 common pain points

When it comes to issuing high-yield bonds, corporations and their lawyers know that the road isn’t always easy. Surprises, inefficiencies and delays can complicate even the best laid plans. Read about five common pain points and ways to mitigate them.

The high-yield market – an essential source of funding for European corporations – is in a state of constant evolution. Deals these days are moving faster. Timelines are getting shorter. And while the asset class saw a significant dip in the number of issuances at the beginning of this year, it also saw a rise in average yields, according to a Fitch Ratings 1Q22 high-yield market insight report.

“The landscape of corporate borrowing has changed significantly in recent years,” say the authors of a May 2022 working paper published by the European Central Bank. “The global rise in bond financing is perhaps the most striking trend. The Eurozone is a remarkable example of this development: although its financial sector has always been heavily bank-based relative to the United States, the aggregate market financing in the Euro area has been growing faster than bank lending since 2000.”

Whether the high-yield market is booming, as it has in past years, or in a period of sluggish volatility, some truths remain universal. Namely, this: when it’s time to move on a deal, you need to act quickly. And when the clock is ticking, you need a trustee and agency partner who can mobilize their resources to meet tight deadlines and help you avoid needless delays and complications.

In this article, we’ll discuss five frequently encountered obstacles and ways you can bypass them.

1. Know your customer (KYC) and onboarding delays

Today’s KYC rules often create labor-intensive tasks within an onboarding checklist. A tenured team understands exactly what documentation they need for compliance. Obtaining everything upfront – at the start of the process – reduces inefficient back-and-forth requests that add work and that place additional demands on your time.

Sophisticated onboarding systems and experienced teams can help create a seamless integration, so you don’t have to worry about delays or missing deadlines. A technology-focused provider will have a robust framework to check, monitor and assess risk during the onboarding process in an efficient fashion. They’re able to examine potential issues and develop flexible solutions that adapt as needs evolve while remaining compliant with policies and regulations. This can produce faster turnarounds and smoother interaction overall.

2. Miscommunication between parties

When too many parties are involved, coordinating efforts becomes difficult. Gaps in communication can occur, and responsibilities can be overlooked. To streamline the process, look for a one-stop-shop partner who can provide a full range of services and act in multiple roles. A multi-functional trustee can deliver operational efficiencies, opportunities for cost reduction and a more integrated onboarding experience.

To ease the burden of managing several parties in a single transaction, consider a single partner that can fill multiples roles, including:

• Indenture trustee

• Security trustee

• Paying agent (including U.S. paying agent)

• Calculation agent

• Common depository

3. Document review that lacks commerciality

Delays and complications arise if your service provider doesn’t understand their role as facilitator, loses sight of the end goal or gets bogged down in trivialities. You want a partner that smoothly and efficiently moves the process forward without creating unnecessary friction.

Document reviewers should have the expertise and awareness to know when – and just as importantly, when not – to make changes. You want revisions to be prompt, pertinent and necessary to avoid slowing the whole process down.

“On one hand, you don’t want document review to be too fast and careless,” says Rosie Brooke-Taylor, vice president of business development at U.S. Bank Global Corporate Trust. “On the other hand, you don’t want it to be too slow, tedious and overdone. You want to find the perfect ‘Goldilocks’ balance of thorough and efficient – a team that clearly understands the intent of what you’re trying to accomplish and works to that end.”

4. Temporary financing (or “bridge loans”)

Occasionally, you may need to secure temporary financing – a short-term loan – to bridge the period of time between when you announce an acquisition and when you issue the bond. This can be done for a variety of reasons, often to buy time when the market is volatile. The process adds extra layers of risk and complexity, and you need a facilitator with experience and a thorough understand of all the steps involved.

“At U.S. Bank, we can act as the security agent and facility agent, serving as the liaison between the borrower and the lender,” says Rosie. “Our experience, track record and flexibility make us especially well-suited for these types of complex transactions.”

5. Jurisdictional limitations

The EU and the U.S. have separate and distinct clearing systems. The EU uses Euroclear and Clearstream, and the U.S. uses the Depository Trust Company (DTC). This can create difficulties if you want to issue a tranche of euro notes and a tranche of U.S. dollar notes. Using a trustee with multi-currency capabilities and a presence in both jurisdictions, however, should make this a non-issue.

“No two transactions are alike, so having global partners that can meet U.S and European requirements is key to staying nimble and avoiding headaches,” says Rosie. “The best trustees prioritize proactiveness, responsiveness and flexibility to ensure you’re able to get what you need when and how you need it.”

At U.S. Bank, we have the experience, reach and technology to navigate the mechanics of complex deals with transparency, consistency and unwavering quality. As new opportunities emerge in the European high-yield landscape, we can help you understand some of the new legal and structural hurdles in this fast-paced market.

For more information about our European trustee solutions, visit our website or contact Rosie Brooke-Taylor at rosie.brooketaylor@usbank.com.