European Junk Revival Stalls as Biggest Borrowers Head to U.S.

  • Issuance slumps 61 percent in April after March boom
  • Leveraged loans back in vogue as CLOs stage a comeback

Europe’s junk-rated borrowers are shunning the euro market even as quantitative easing cuts borrowing costs to the lowest in eight months.

April sales tumbled 61 percent from a month earlier to 2.6 billion euros ($3 billion), according to data compiled by Bloomberg. Altice NV and Liberty Global Plc, the biggest euro junk-bond issuers, both sold debt in dollars as currency advantages make greenback notes even cheaper than debt in the single currency.

“European investors would like to see more issuance, however the challenge is to be cost competitive versus the U.S. market when the swap differential is against euro versus dollar,” said Diarmuid Toomey, head of European high yield capital markets at Deutsche Bank AG.

The cost of converting dollar funds into euros has fallen to the lowest in two years partly due to a flood of U.S. companies borrowing in euros. That’s encouraging European issuers to overlook euro borrowing costs pushed to less than 5 percent in the wake of the European Central Bank’s announcement that it would expand stimulus.

Companies linked to French billionaire Patrick Drahi’s Altice borrowed about $12 billion in bonds and a loan. That included a $5.2 billion sale by its Numericable-SFR SA unit, the single largest junk-note deal in history. Liberty Global held a $750 million bond sale on April 12.

A spokesman at Altice declined to comment on the sale, while an official at London-based Liberty Global didn’t immediately comment.

Dollar Funding

The cost for companies to convert dollar funding into euros using five-year cross-currency basis swaps fell to 56 basis points below the dollar Libor rate on March 11. The rate was 45 basis points below dollar Libor on Friday.

“Selling in dollars and swapping back into euros can be advantageous for large transactions, and sometimes outweighs the benefit of ECB-driven lower yields in Europe,” said Daniel Lamy, a London-based JPMorgan Chase & Co. credit strategist. “Along with the cheaper cost of borrowing in the loan market, these are reasons why we had less bond issuance this month.”

Leveraged Loans

ECB stimulus helped spur high-yield bond sales in March to 6.6 billion euros, the strongest month since July and a turnaround after the slowest start to a year since 2009. Speculation that investors would turn to riskier assets as the central bank mopped up the safest bonds sent the average yield on euro-denominated junk debt to as low as 4.74 percent, according to Bank of America Merrill Lynch index data.

By contrast, collateralized-loan obligations rebounded amid a pick-up in leveraged loans.  

Sales of CLOs, which package leveraged loans into tradeable securities, jumped to 2.6 billion euros in the past two months, according to data compiled by Bloomberg. Concern over credit deterioration and a commodities rout had squashed issuance to 825 million euros in the previous two months.

Borrowers are attracted to the loan market’s relative flexibility, improved capacity and lower funding costs.

“We pitch loans and bonds to companies but the loan market at the moment arguably provides more attractive terms for smaller, lower-rated firms,” said Steffen Wasserhess, head of non-investment grade and high yield syndicate at UniCredit SpA. “A lot of these companies generally prefer loan financing as the whole process is much less cumbersome.”

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