Junk Yields in Europe Tumble to Lowest Since Before Crisis
Lenders to speculative-grade companies in Europe are charging the lowest interest rates since before credit markets seized up in a sign they don’t expect the region’s fiscal crisis to infect corporate debt.
Investors demand an average yield of 7.62 percent to hold junk-rated European debt, the lowest since July 2007, according to Bank of America Merrill Lynch index data. Yields on bonds sold by Continental AG, Europe’s second-largest auto parts supplier, and German drugmaker Phoenix Pharmahandel GmbH & Co KG have fallen more than 2 percentage points in the past three months.
While nations from Greece to Ireland struggle with budget deficits above the European Union limit, companies are taking advantage of a global rally in corporate debt to refinance and extend maturities. The default rate in the region fell to 3.5 percent at the end of September from 5.6 percent three months earlier, and is forecast to drop to 2.2 percent by year-end, Moody’s Investors Service said in an Oct. 7 report.
“High-yield companies have restructured their balance sheets” and “the outlook is positive for them to service their debt,” said Louis Gargour, chief investment officer in London at LNG Capital LLP, which is raising $100 million for a new European high-yield credit fund. “Whereas governments have done the opposite.”
European corporate junk bonds have returned 16 percent this year, including reinvested interest, Bank of America Merrill Lynch data show, helping sales almost double and borrowers avoid default. Euro-region government notes returned little more than half that as fundraising programs to plug budget shortfalls and bail out banking systems in so-called peripheral countries weighed on sovereign credit.
Companies in Europe issued 57 billion euros ($79 billion) of junk-rated bonds this year, almost double the amount raised in the same period in 2009, according to data compiled by Bloomberg. High-yield, or junk, bonds are rated below Baa3 by Moody’s and BBB- by Standard & Poor’s.
Elsewhere in credit markets, the cost of default protection on bonds sold by Greece, where Europe’s sovereign debt crisis began, plunged almost 5 percent after the International Monetary Fund said it may be given more time to repay its bailout loans.
BP Plc cut the size of a loan after raising more than it was seeking in a bond sale, while the extra yield investors demand to hold global corporate notes rather than government debentures dropped to the least in almost five months.
Credit-default swaps on Greece fell 33 basis points to 698, the lowest since May 31 and implying a 45 percent probability the nation won’t meet its commitments, according to data provider CMA. IMF Managing Director Dominique Strauss-Kahn said Greece’s $154 billion loan package could be extended if other nations in the region agree.
Contracts on the Markit iTraxx Crossover Index of 50 mostly junk-rated European companies fell 15 basis points to 454 as of 5:21 p.m. in London, according to Markit Group Ltd. The Markit iTraxx SovX Western Europe Index of swaps on 15 governments dropped 2 basis points to 144, CMA prices show.
Credit-default swaps typically fall as investor confidence improves and rise as it deteriorates. The contracts pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt, and a basis point equals $1,000 annually on a swap protecting $10 million of debt.
BP, the oil company that’s raising money to fund cleanup costs of the Gulf of Mexico spill, will reduce a loan backed by Angolan crude sales by $500 million to $2.5 billion from an initial amount of $3 billion, according to a person with knowledge of the matter.
Europe’s second largest oil company decided to cut the size of the financing after increasing a bond issue by a third to 2 billion euros on Oct. 4, said the person, who declined to be identified because the transaction is private. BP also plans to increase a separate loan backed by revenue from the Azeri- Chirag-Deepwater Gunashli oil field off the coast of Azerbaijan to $2.25 billion from a planned $2 billion after the deal drew surplus demand, according to a separate person.
Robert Wine, a spokesman for London-based BP, declined to comment.
The holding company of Liverpool soccer club in England is in default over 280 million pounds ($446 million) owed to Royal Bank of Scotland Group Plc and Wells Fargo & Co., and the banks may put the debtor into bankruptcy protection, according to three people familiar with the situation.
Spreads on company bonds from the U.S. to Europe and Asia ended last week at 169 basis points, or 1.69 percentage points, more than government debt, according to Bank of America Merrill Lynch’s Global Broad Market Corporate index. That’s the narrowest since May 13 and down 12 basis points since August. The gap has ranged from a low this year of 142 basis points in April to a high in June of 201. Average yields fell to 3.37 percent from 3.48 percent on Oct. 1.
In emerging markets, relative yields shrank 2 basis points for the week to 269 basis points, the lowest since Aug. 23, JPMorgan Chase & Co. index data show.
Yields on European junk bonds have fallen faster than those in the U.S. The average rate dropped from as high as 10.35 percent in June, according to Bank of America Merrill Lynch’s EMU Corporate Index, while for U.S. bonds, yields fell to 7.87 percent from 9.49 percent.
European bonds have also returned more than their U.S. counterparts, which gained 13 percent in 2010, though less than Asian dollar notes which handed investors 20 percent, according to Bank of America Merrill Lynch’s indexes.
Globally, the securities rallied 14 percent, compared with 60.6 percent for all of 2009. The returns compare with 7 percent for investment-grade bonds in euros and 6.6 percent for euro- region government debt, the indexes show.
Encouraged by investor appetite for these returns, Spanish engineering and biofuel producer Abengoa SA and laboratory services company Exova AB are among junk-rated companies planning or marketing bond sales in Europe, according to data compiled by Bloomberg.
Seville, Spain-based Abengoa is planning to sell $600 million of seven-year notes in its first issue in the U.S. currency, Bloomberg data show. The company is rated Ba3 by Moody’s, three levels below investment grade, and one step higher at BB by Fitch Ratings.
Exova is marketing 155 million pounds of eight-year bonds that are redeemable after four years, according to a banker involved in the transaction, who declined to be identified because the terms are private. Exova’s new notes are expected to receive a B3 rating from Moody’s, six steps below investment grade, and an equivalent B- from S&P, the banker said.
Eastern Europe TV
Hamilton, Bermuda-based Central European Media Enterprises Ltd., which owns television stations in central and eastern Europe, is planning a 170 million-euro issue of seven-year securities, a banker involved in the transaction said. That will be the speculative-grade company’s first bond sale in a year, Bloomberg data show.
“Investors are still keen for junk bonds,” said Ben Squire, a senior credit analyst in London at Societe Generale SA, France’s second-biggest bank. “Companies’ fundamentals are broadly attractive.”
Phoenix, the drug wholesaler owned by Germany’s Merckle family, sold 506 million euros of four-year notes in July that were priced to yield 894 basis points more than government bonds. The spread has since tightened 333, according to Bank of America Merrill Lynch index data. Continental sold its 750 million euros of 2015 bonds on July 9 at a yield premium of 716 basis points, and the spread has shrunk to 236, the data show.
$1 Trillion Bailout
The EU and IMF were forced to bail out the most indebted euro-region members with a $1 trillion loan package in May. The crisis spread through the mostly southern European nations starting in the first quarter, driving up their borrowing costs.
Spain’s top credit rating was cut one level by Moody’s on Sept. 30, which cited the country’s “weak” economic outlook. Ireland estimated on the same day that the cost of repairing its financial system may rise to as much a 50 billion euros, which would drive its budget deficit to 32 percent of gross domestic product.
Irish 10-year bond yields soared to a record 454 basis points more than German bunds on Sept. 29, Bloomberg data show. Portuguese 2020 debt spreads jumped to an all-time high of 441 basis points a day earlier, while Spain’s yields reached a two- month high of 199 against the German benchmark.
Low Interest Rates
Corporate junk bonds, meanwhile, are benefitting from central banks’ low rate policies to help economies recover. The European Central Bank cut its main refinancing rate to an all- time low 1 percent in April 2009 and has kept it there ever since, while the Federal Reserve has maintained its target rate for overnight loans between banks in a record-low range of zero percent to 0.25 percent since December 2008.
“Bizarrely, the lower down the credit spectrum you are, the better the picture in terms of insulation to sovereign debt concerns” because “such companies would never have been bailed out by a government,” said Mahesh Bhimalingam, head of European fundamental credit strategy in London at Deutsche Bank AG, Germany’s biggest lender. “High-yield companies have actually benefitted in terms of demand from the sovereign debt crisis as they are insulated from their countries’ deficits.”
To contact the editor responsible for this story: Paul Armstrong at Parmstrong10@bloomberg.net