Debut Bond Sales Swell in Europe as Risks Mount: Credit Markets
Companies are debuting a record amount of bonds in Europe as investors demanding higher yields show greater tolerance for untested borrowers who are seeking to diversify funding as banks curtail lending.
Finnish insulation maker Paroc Group Oy and French car parts distributor Autodis SA are among 54 first-time issuers that sold 20 billion euros ($27 billion) of notes this year, compared with 40 companies selling 14 billion euros in the same period last year, according to data compiled by Bloomberg. More than 75 percent were either unrated or below investment grade, with more than half of those ranked B or lower.
“Issuers can sell anything they want and it’s getting bought,” said David Newman, the London-based head of global high yield at Rogge Global Partners, which manages $55 billion. “Worse and worse credits are coming to market.”
Increasing demand for riskier securities has prompted warnings by policy makers that easy money is encouraging investor complacency and leaving markets vulnerable to a swift reversal. Yields on company bonds in Europe slumped to lows this month after the European Central Bank cut its benchmark interest rate to 0.15 percent.
The average yield on investment-grade corporate bonds in euros has fallen 59 basis points this year to a record low of 1.49 percent, according to Bank of America Merrill Lynch index data. Yields on speculative-grade debt declined to a low of 3.46 percent in May from a an unprecedented 27.8 percent in 2009. They have since increased to 3.57 percent, the data show.
New borrowers in the bond market typically have to pay as much as 50 basis points in additional yield to investors, according Shahzada Omar Saeed, the Zurich-based global head of high yield at Swisscanto Asset Management Ltd., which manages $57 billion.
“There’s a clear trend toward debut issuance,” Saeed said in a telephone interview. “It isn’t a free lunch because there’s never a free lunch in high yield, but it’s a very compelling opportunity.”
High-yield bonds are rated below Baa3 by Moody’s Investors Service and BBB- by Standard & Poor’s.
Paroc sold 430 million euros of fixed- and floating-rate notes last month, Bloomberg data show. The securities were rated B by S&P and provisionally ranked B2 by Moody’s.
The Helsinki-based company’s 200 million euros of six-year bonds were priced to yield 6.25 percent and compare with an average yield of 4.25 percent for similarly rated debt in May, according to Bank of America Merrill Lynch’s Single B Euro High Yield Index.
“The yield was according to our expectations,” Mika Toikka, a spokesman for Paroc, said in an e-mailed response to questions. The bond “offers more flexibility to implement our strategy.”
Autodis’s 240 million euros of notes due February 2019 were priced to yield 6.5 percent, Bloomberg data show. The securities, which were sold in January, were ranked B3 by Moody’s and B+ by S&P.
“We wanted to avoid the constraints of loan covenants that would have deprived us of flexibility,” the company said in an e-mailed statement in response to questions. “The bond offered interesting financing opportunities at competitive rates. Thanks to a significant oversubscription from investors our interest rate was considerably reduced from 8 percent to 6.5 percent.”
The equivalent of $312 billion of speculative-grade bonds were issued globally this year, the most for the period since at least 1999, when Bloomberg began compiling the data.
In Europe, 35 percent to 40 percent of high-yield bond sales were from first-time issuers compared with about 5 percent in the U.S., according to Louis Gargour, the chief investment officer at LNG Capital, a London-based hedge fund that focuses on credit markets in western Europe.
“This creates an exciting and opportunistic European new issue market,” Gargour said in a telephone interview yesterday. “New issuance is good because it introduces idiosyncratic volatility and fresh blood. It’s great for hedge funds and OK for the market.”
ECB President Mario Draghi indicated on June 21 that the central bank’s record-low interest rates will probably remain low for at least another 2 1/2 years. Officials from Britain to Germany are warning that a persistent easing policy may brew trouble.
While the low-interest-rate environment is appropriate at the moment, it’s “worrisome” over a longer period of time, Bundesbank board member Andreas Dombret said in a Bloomberg Television interview with Haslinda Amin in Singapore on June 19. The two newest members of the Bank of England’s Monetary Policy Committee, Kristin Forbes and Andy Haldane, said at separate events on June 18 that easy monetary policy may be making investors too sanguine about risk in their search for yield.
Policy makers need to take to the “bully pulpit” to “remind investors there is going to be a change in interest rates at some point in the future,” Forbes, a Massachusetts Institute of Technology professor who will join the MPC next month, told lawmakers at her appointment hearing in London.
Ultra-loose monetary policy has yet to benefit all parts of Europe, with bank lending in the region still shrinking. High-yield loans to companies in Europe, Middle East and Africa slumped this year to the equivalent of $67 billion from $107 billion in the first six months of 2013, Bloomberg data show. Banks extended the fewest loans since the first half of 2010, the data show.
“Many of the deals we see coming through are quite familiar because a lot of them are loan-to-bond refinancing,” said Peter Aspbury, a high-yield portfolio manager at JPMorgan Asset Management, which oversees $1.6 trillion globally. “The other prevailing trend is deleveraging of euro zone bank balance sheets which is pushing more middle-market deals to market.”
Novafives SAS, a Paris-based industrial engineering group and Feltham, England-based Iglo Foods Group are among companies planning their first bonds in euros, according to preliminary data compiled by Bloomberg.
“High yield has become the fashion purchase, so there’s scope for very large price falls,” said Alan Miller, founding partner and chief investment officer at SCM Private, a London-based wealth manager founded in 2009. “If there was a rout and lots of people selling, many mutual funds would be totally unable to meet liquidity and we would witness a huge wave of suspensions of bond funds.”