Europe’s Junk Borrowers Tap U.S. at Record Pace
European high-yield companies are tapping the U.S. bond market at a record pace as investors funnel unprecedented amounts of cash into dollar-denominated junk-debt funds and the sovereign crisis restricts bank lending in the region.
Issuers led by Germany’s Fresenius Medical Care AG (FME) have sold $8.8 billion of the debt in dollars this year, following $16.4 billion in all of 2011, according to Morgan Stanley. The portion of European speculative-grade offerings sold in dollars has soared to 44 percent this year, up from 31 percent in 2011 and double the rate in 2010.
Borrowers in Europe, where politicians are struggling to contain the fiscal contagion that led to the bailouts of Greece, Portugal and Ireland, are seeking lower financing costs by marketing to investors in the U.S. Relative yields on European junk-rated debt average 222 basis points more than on similarly rated U.S. bonds, compared with 77 in 2011, Bank of America Merrill Lynch index data show.
“It stands to reason if you are a European issuer, you are going to look opportunistically to access the most favorable market,” William Hughes, the head of North American leveraged syndicate at Citigroup Inc., said in a telephone interview. “For many issuers that decision has led them to dollar denominated high-yield bonds and leveraged loans.”
Schaeffler AG’s two-part bond offering on Feb. 2 was split between euro and dollar portions, both maturing in five years with coupons of 7.75 percent, according to data compiled by Bloomberg. While the German rolling bearings manufacturer’s 800 million euro slice yields 6.5 percent, its $600 million dollar piece yields 6.1 percent.
Dollar issuance from European high-yield companies may reach $30 billion this year, with most of the proceeds used to repay existing debt, Barclays Capital analysts Sherif Hamid, Gautam Kakodkar and Darpan Harar wrote in a report dated March 2. The total volume is “highly variable,” depending in part on continued investor demand, they wrote.
Elsewhere in credit markets, a benchmark gauge of U.S. company credit risk rose with the Markit CDX North America Investment Grade Index, which investors use to hedge against losses or to speculate on creditworthiness, climbing 1.6 basis points to a mid-price of 95.5 basis points at 11:32 a.m. in New York, according to Markit Group Ltd.
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The index, which typically rises as investor confidence deteriorates and falls as it improves, has climbed from 92.8 on March 1, which was the lowest on a closing basis since July 22. Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
Bonds of Fairfield, Connecticut-based General Electric Co. are the most actively traded U.S. corporate securities by dealers today, with 42 trades of $1 million or more as of 11:35 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
The two-year interest-rate swap spread, a measure of debt market stress, rose 1 basis point to 25.69 basis points as of 11:32 a.m. in New York. The gauge, which widens when investors seek the perceived safety of government securities and narrows when they favor assets such as corporate bonds, has climbed from 24.69 on March 2, the lowest since Aug. 11.
Investors have poured $13.5 billion into U.S. junk-bond funds this year, compared with $15.6 billion for all of 2011, JPMorgan researchers led by Peter Acciavatti wrote in a March 1 report. Nine of the 10 largest weekly inflows on record into American speculative-grade mutual funds have occurred since October, according to the report, which cites data from Lipper.
Investors are demanding 733 basis points more than government debt to own European junk notes, compared with 597 basis points for U.S. speculative-grade notes, Bank of America Merrill Lynch index data show.
The gap between the relative yields was 310 basis points at the beginning of the year. As recently as June, spreads on European junk bonds were tighter than those in the U.S.
Fresenius, the world’s biggest provider of kidney dialysis, sold $1.5 billion of bonds in dollars on Jan. 17 consisting of $800 million of 5.625 percent notes due July 2019 and $700 million of 5.875 percent debt maturing in January 2022, Bloomberg data show. The company is rated Ba1 by Moody’s and BB+ at S&P, both one level below investment grade.
Proceeds may be used to help fund the Bad Homburg, Germany- based company’s purchase of Liberty Dialysis Holdings Inc. and repay debt, according to a person with knowledge of the sale, who declined to be identified citing lack of authorization to speak publicly.
“European companies have been able to borrow in dollars at lower yields than they can borrow in euros,” Andrew Sheets, head of European credit strategy at Morgan Stanley in London, said in a telephone interview. “Strong inflows into U.S. high yield have created a healthy appetite for new bond supply.”
Yields in the U.S. average 7.53 percent, compared with 8.77 percent in Europe. The gap in yields, at 1.2 percentage points, is up from 0.37 percentage point a year ago, Bank of America Merrill Lynch indexes show.
European borrowers raised more than $6 billion of loans in the U.S. this year through Feb. 15, compared with $1.33 billion in the same period of 2011, Bloomberg data show.
Greece’s debt restructuring is prompting European banks to curtail lending as political leaders accelerate payments to the planned permanent bailout fund. Lending to non-financial borrowers fell 1 percent in Ireland and 0.7 percent in Spain compared with the previous month, according to a Royal Bank of Scotland Group Plc report dated Feb. 27.
“Lending activity in the periphery will remain stagnant at best, in our view, as banks continue to struggle with deleveraging, recapitalizations and capital flight risk,” RBS analysts led by Alberto Gallo in London wrote.
The cost of credit-default swaps on Greek government debt on March 2 signaled a 99 percent chance the nation will default within five years, according to CMA. Swaps were quoted at $7.6 million in advance and $100,000 annually to insure $10 million of debt by BNP Paribas SA and CMA.
“We do expect a bias for certain companies, particularly those that have certain exposures in the U.S., to continue to take advantage of what is still a more liquid financing market,” said Michael Moravec, European head of high-yield capital markets at Barclays Capital in London.