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One of the riskiest corners of the European bond market is enjoying its busiest January ever as companies rush to grab ultra-cheap yields and some of the more dubious instruments popular ahead of the financial crisis resurface.
Junk-rated borrowers lined up close to 7 billion euros of issuance into the market this week, with sales nearing the 10 billion euro mark ($11 billion) this month, Bloomberg data show.
“We’re definitely in peak greed territory,” Olivier Monnoyeur, a portfolio manager at BNP Paribas Asset Management, which overseas 436 billion euros of assets. “We’ve seen this movie before, and it doesn’t end well.”
From Bulgarian telecoms providers to the carpet makers to the British royal family, companies across Europe are marketing jumbo multi-currency debt packages. In one of the biggest deals so far this year, more than 2 billion euros of bonds and loans backing the acquisition of the Dutch TV production company behind “Black Mirror” launched to the market on Tuesday.
Read more: ‘Black Mirror’ Producer Hits Debt Market for Acquisition Funding
High-yield borrowers are following in the footsteps of Europe’s investment-grade market, which has also seen a record-breaking flurry of bond issuance this year. For now though, syndicate bankers are still testing the waters in Europe’s high-yield market. Most of the deals so far have been from issuers with well-known capital structures, said Andrey Kuznetsov, senior credit portfolio Manager at Hermes Investment Management.
Rising opportunities have increased risk in the primary market. Recent investor offers include debt which ranks toward the lowest end of the junk ratings spectrum, with a higher probability of default. United Group’s deal to fund its acquisition of telecoms operator Vivacom includes 170 million euros of payment-in-kind bonds, which give the borrower the option to repay interest with even more debt. The instrument was used widely in the run-up to the financial crisis.
But investors who have been hard pressed to source juicy yields since the European Central Bank restarted its bond-buying program in October may welcome some of the higher risk securities on offer this week.
“The lower-for-longer message from central banks, combined with optimism around an amicable conclusion to the trade war has reignited the global hunt for yield,” Kevin Foley, JPMorgan Chase & Co.’s head of leveraged finance capital markets for EMEA, said in an interview. “Yields in the high-yield market are flirting with all-time lows and issuers are recognizing the opportunity.”
Low funding costs are also driving borrowers to favor bonds over loans, with names including Techem GmbH, Ineos Styrolution, Stena International SA and Victoria all repaying their loan debt with cheaper bond financing.
‘Cash is Trash’
Yields on European junk bonds have fallen to around 3.3%, the lowest in almost two years and hovering near all time lows, according to Bloomberg’s Barclays index data. The number of high-yield bonds trading above face value currently offers investors little upside, Hermes’ Kuznetsov says, and will encourage buying new deals that “capture potential”.
While Europe’s junk bond investors enjoyed extraordinary returns last year of 12.2%, this year’s estimates are projected to be underwhelming and could spur an increase in risk taking appetite from investors.
Earlier this week, Bridgewater’s Ray Dalio urged investors not to miss out an opportunity to benefit from strong markets. “Cash is trash,” he said in a CNBC interview in Davos on Tuesday.
(Adds chart showing low yields and new quote in third paragraph)
--With assistance from Paul Cohen.
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