AI: Using European Floating Rate Notes (FRNs) as an Alternative to Leveraged Loans and Fixed Rate Bonds

Actionable Ideas for Companies and Sponsors

Using European Floating Rate Notes (FRNs) as an Alternative to Leveraged Loans and Fixed Rate Bonds

The European high yield bond market has played host to an increase in FRN issuance in Q4, with €2.8 billion pricing contributing to year-to-date FRN issuance of €7.0 billion.

Compared to a leverage loan, raising capital through an FRN issuance is attractive to issuers for a number of reasons, including: (i) providing access to capital for issuers from sectors that have traditionally been less welcomed by the leveraged loan market, (ii) eliminating the need to provide investors with forecast financials or due diligence reports, (iii) accelerating the syndication process to a week or less, and (iv) achieving potentially tighter pricing through inclusion of a concurrent fixed-rate tranche in order to take advantage of favorable bond market dynamics and drive competitive tension between the tranches.

Compared to a fixed-rate high yield bond, raising capital through an FRN issuance is attractive to issuers for a number of reasons, including: (i) widening the potential investor base to include European CLOs, with CLO formation at post-crisis record highs, (ii) achieving favorable call protection versus fixed-rate bonds with the typical FRN being subject to a Non-Call 1 / 101% or Non-Call 1 / Par call structure, and (iii) allowing for best execution of sub-benchmark bonds or tranches (bonds less than or equal to €250 million).