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Gross sales of dangerous European company debt surged to their highest ever degree in June, as lowly rated firms make the most of a capital flight out of US markets on fears over the fallout from President Donald Trump’s commerce tariffs.
Issuance by high-yield, or junk-rated, firms — lots of which have beforehand struggled to entry the market — rose to about €23bn in June, in keeping with JPMorgan knowledge. That beats the earlier month-to-month report, set in June 2021, by roughly €5bn.
June additionally noticed the best variety of offers on report at 44, in keeping with PitchBook knowledge.
“The market is drowning in new offers,” mentioned an investor at a European credit score hedge fund.
Junk-rated firms are responding to a fall in borrowing prices resulting from larger demand from buyers, lots of whom are shifting allocations away from US belongings resulting from Trump’s erratic commerce coverage and considerations concerning the authorities’s large borrowing wants.
Though the US inventory market has rebounded strongly within the second quarter, a broad shift away from greenback bond markets has continued, serving to drive the dollar to its weakest begin to the yr in additional than half a century. European high-yield bond funds, in the meantime, have posted seven straight weeks of inflows, in keeping with Financial institution of America knowledge.
Such has been the demand in Europe that firms together with bullets producer Czechoslovak Group and butter-substitute maker Flora prior to now week have been in a position to faucet bond markets that beforehand proved troublesome to entry.
“There’s a large amount of money to be invested . . . It’s the type of market the place persons are wanting on the artwork of the doable,” mentioned Ben Thompson, head of Emea leveraged finance capital markets at JPMorgan.
KKR-owned Flora’s deal marked the primary by a triple C-rated issuer — one of many lowest bands within the credit score spectrum — in nearly a yr. Investor demand for riskier credit meant it was additionally in a position to concern the bonds underneath Norwegian regulation, a regime that has historically been lighter on disclosures and protections than another western markets.
Flora priced €400mn of bonds on Monday at a yield of 8.625 per cent, roughly 4 proportion factors decrease than different excellent debt with an analogous ranking, and after the corporate needed to pull one other bond deal final yr.
Prague-based CSG was in a position to worth new five-year greenback and euro debt at yields of 6.5 per cent and 5.25 per cent respectively final week. That marks a dramatic decline in borrowing prices since its most up-to-date financing, a $775mn bond in November that the Monetary Instances reported was offered to non-public credit score companies at an rate of interest of greater than 11 per cent.
Additionally out there providing new euro-denominated debt to buyers is junk-rated Carnival, the world’s largest cruise operator, which prior to now few years was compelled to cost offers secured on its cruise ships at double-digit rates of interest.
Excessive yield spreads — the additional yield over authorities debt that dangerous debtors should pay — have dropped from greater than 4 proportion factors in April to three.1 proportion factors on the finish of June, in keeping with Ice BofA knowledge.
“You possibly can print fairly excessive danger stuff at very engaging charges in the intervening time. The market is working purple sizzling,” mentioned one high-yield bond investor. “There are inflows coming into our market as individuals need to diversify away from the US.”
President Trump’s commerce insurance policies have prompted many huge buyers to rethink their overwhelming choice for the US, given the larger degree of uncertainty.
“There’s an enormous quantity of capital flowing into the asset class . . . and we’re beginning to see bigger managers focus extra on Europe,” mentioned Thompson.
Issuers with troubled pasts, or these providing advanced and subordinated devices akin to payment-in-kind bonds — the place curiosity could be rolled up into the principal to be repaid on maturity — have additionally been eagerly welcomed by buyers with massive quantities of money to deploy.
Footwear large Skechers final week priced €1bn of bonds, alongside one other $2.2bn of bonds that included a payment-in-kind characteristic, with the euro portion being elevated from an preliminary providing measurement of €750mn.
“Managers are determined to take a position,” mentioned one leveraged finance banker.
