European junk bonds have experienced the longest sales drought in more than a decade

(Bloomberg) – Junk bond sales across Europe are experiencing their longest drought in over a decade as Russia’s invasion of Ukraine and the prospect of higher interest rates dampen risk appetite.

A new high yield corporate bond has not been listed in Europe since February 10. The last time the junk primary market remained closed for this long was in late 2011, when the continent was in the midst of a sovereign debt crisis, according to Bloomberg data.

Soaring inflation, monetary tightening and Europe’s worst geopolitical crisis since World War II have crippled the market for the region’s riskiest issuers, leaving banks looking for an opportunity to offload billions of euros from debt incurred on their balance sheets. Signs, however, indicate that the long freeze may be coming to an end, as a trickle of riskier trades hit the market and secondary trading yields fall from their early March highs.

“If you as an issuer can afford to wait, you are probably waiting,” said Olivier Monnoyeur, portfolio manager at BNP Paribas Asset Management. “It’s a case where the people who can come don’t want to, and the people who have to come are working behind the scenes with their banks to see what’s doable in that market.”

Repeating History

Sales of high-yield securities in Europe dried up in 2011 as the continent’s sovereign debt crisis intensified. Peripheral economies such as Greece and Portugal were on the verge of default, while Italy was also going through an economic and political crisis, dampening investors’ appetite for all but the safest debt.

The current pause has now surpassed that of March 2020, when global markets convulsed amid the first wave of the coronavirus outbreak. The European high-yield market finally reopened with a relatively small 150 million euro ($163 million) bond from Swedish security systems maker Verisure Holding AB.

Some riskier debt, including cross bond offerings with both investment grade and junk ratings, such as Cellnex and Teollisuuden Voima Oyj, have managed to rise in value in recent weeks. These sales paved the way for the first publicly traded company to launch a deal in the days and weeks to come.

Barclays and HSBC, for example, are preparing an £815m deal underpinning Apollo’s acquisition of British builder Miller Homes in the coming weeks.

“Issuers have to get used to the new price levels,” said Roman Gaiser, head of EMEA fixed income and high yield at Columbia Threadneedle. “The starting point will now be different, then the market will reopen.”

Elsewhere in the credit markets:

EMEA

SAS Nerval is offering a 10-year euro green bond that could be priced on Friday. SSE has mandated banks ahead of a possible hybrid bond sale, with investor calls due Monday.

  • Hexagon, a UK Housing Association, has also joined the pipeline; plans to sell £250m 25-30 year sustainable bond
  • Subordinated bonds known as Banco BMP’s Additional Tier 1 gained up to 2 cents on the euro after Credit Agricole bought a 9.2% stake in the Italian lender
  • European-listed property companies that rely on debt markets for funding could soon see their public ratings come under pressure if a new financial metric becomes standard reporting practice across the industry.
  • In a report on the cost and performance of EU retail investment products in 2020, European market watchdog ESMA says UCITS with ESG strategies outperformed their non-ESG counterparts and were also cheaper overall.
  • Wizz Air is a potential fallen angel in the European airline industry, Barclays analyst says, citing weak fuel hedging

Asia

Global funds cut their holdings of Chinese bonds the most last month amid the country’s diminishing yield advantage over the United States and geopolitical uncertainties posed by the war in Ukraine.

  • Asia has some of the largest and fastest growing economies in the world, but the region that wants more investment is only a fraction of the global private credit market.
  • India’s central bank signaled a shift in policy stance by stepping up efforts to mop up excess liquidity in the banking system and raising its inflation forecast, pushing bond yields higher
  • Vietnamese Prime Minister Pham Minh Chinh orders the Ministry of Finance and the central bank to closely monitor the issuance and trading of corporate bonds and the use of proceeds from the sale of bonds to ensure that they follow the law

Americas

A rally in global credit markets has stalled in recent days as the US Federal Reserve weighs its nearly $9 trillion balance sheet by more than $1 trillion a year, which would help tighten conditions financial.

  • St. Louis Federal Reserve Chairman James Bullard said he favors a sharp hike in interest rates to counter the highest inflation in four decades, and suggested he backs a increase of half a point in May as well as the reduction of the Fed’s bloated balance sheet.
  • Keurig Dr Pepper Inc. sold $3 billion of investment-grade debt to help fund a takeover bid and buyout as companies continue to sell US investment-grade debt despite rising prices borrowing costs
  • Investors can’t get enough US leveraged loans this year. Funds focused on corporate debt saw an inflow of $1.95 billion last week, according to data from Refinitiv Lipper. It was one of the largest influxes ever recorded
  • Harvard University plans to sell its first-ever green bonds to finance the construction of a new science and technology complex and for the renovation of existing dormitories

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Mary I. Bruner