By Natalie Harrison LONDON, May 10 (Reuters) - Europe's high-yield bond market, which has navigated recent turmoil better than other asset classes, is set to lead the way in a further test of investor risk appetite with at least two new deals this week. "The more punchy deals that are coming out now will be the ones that really test the market," said a fund manager who asked not to be named, referring to planned issues from auto brake pads maker TMD Friction and insurer Towergate Finance. While investment-grade corporate and financial issuance has fallen off a cliff in the past month, the high-yield market has proven its resilience with several notable deals, including the biggest debut issue on record from Dutch cable company Ziggo. European high-yield corporate issuance is on track for record supply this year, with around 20 billion euros ($26.8 billion) already raised compared with around 32 billion in 2009, according to Barclays Capital. The European high-yield market, excluding financials, has returned 5.2 percent year-to-date, Barclays said. "Investors have a lot of cash, but there are also plenty of investment-grade fund managers that have raised their high-yield allocation to capture the huge yield potential out there," said Parmeshwar Chadha, manager of the Newton Global High Yield Bond fund. "High-yield is the only asset class out there where you can pick up yield." THE HUNT FOR YIELD Private-equity owned Ziggo raised 1.2 billion euros on one of the most volatile trading days during the Greek debt crisis last month, while International Power forged ahead with a 250 million euro bond last week just as global financial markets tanked. British chemicals firm Ineos also raised the size of its 5-year senior secured issue by 50 million euros to 300 million last week after drawing strong orders of some 2.8 billion, a source familiar with the deal said. "This is an opportunity for the high-yield market to mature in a way that it hasn't been able to before," said Paul Watters, head of corporate research at Standard & Poor's. "But what would be a disaster would be a return to the boom and bust era, with limited supply and too much money chasing higher yield and compressing spreads." Towergate plans a two-part high-yield bond, consisting of a 300 million pound 8-year senior unsecured note and a 7-year 365 million pound senior secured note. TMD Friction, which was bought by private equity firm Pamplona Capital Management in April 2009 after declaring insolvency, is expected to come to the market with a 160 million euro 7-year bond as soon as Tuesday, another fund manager said. Credit Suisse and Quirin Bank are managing the TMD deal and Credit Suisse and JP Morgan are leading the Towergate deal. It is the proposed use of TMD bond proceeds to repay a shareholder loan that is raising some eyebrows. "I am surprised that the private equity sponsor is getting out quite so quick and I am still mulling over why there is such a swift exit," said the fund manager. One London-based syndicate banker said it was a positive sign that something other than bank loan refinancing, which has mostly driven the surge in high-yield issuance, was getting done in the bond market. "I think the company wants a yield of sub-10 (percent), but their brokers are saying that they might want to think 50-75 bps higher than that," the fund manager said. In comparison, yields on the Ziggo and Ineos bonds were 8.125 and 9.25 percent respectively. The fund manager said TMD has a debt to earnings before interest, tax, depreciation and amortisation (EBITDA) ratio of about 3.3 times, excluding its 84 billion euros cash balances. That is modest compared to the average of over 6 times reached during the leveraged buyout boom. (Editing by David Cowell) ($1 = 0.7453 euro) Keywords: CREDIT/HIGHYIELD (email@example.com; +44 207 542 2687; Reuters Messaging: firstname.lastname@example.org) COPYRIGHT Copyright Thomson Reuters 2010. All rights reserved.
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