Defaults are few and far between in the European High Yield market at the moment but we have another today as Schefenacker, a German auto supplier that makes mirrors and lights, has announced a financial restructuring. Holders of the €200m bond issued in February 2004 have been offered 5% of the equity.
This should serve as a reminder to the current jubilant credit market that companies can go bust, although I suspect that it will be seen as part of the auto industry malaise that the rest of the market is insulated from. It should also question recovery rates. Schefenacker bonds are trading at around 10% which is much lower than the “normal” 40% assumption that is the perceived wisdom. With more loans and second lien loans ranking ahead of the bonds, we should expect recovery rates to be lower over the next credit cycle.