ECB’s Bond Buying Boosts Parts of the Market It Can’t Even Touch

  • Companies in Portugal take advantage of search for yield
  • Portugal shows more investors are turning to riskier debt

Even companies with no credit rating in a country that’s home to the worst-performing bond market in Europe are eyeing cuts to their borrowing costs.

Some corporate borrowers in Portugal are aiming to cash in on demand among some investors for riskier, higher-returning assets by refinancing their debt at a lower interest rate or with more time to repay it. While they don’t qualify for the European Central Bank’s bond-buying program, it’s further evidence the billions of euros being pumped into the system every month is penetrating all corners of the market.

“There is growing demand for unrated or junk corporate bonds in Portugal precisely because they usually offer higher returns than the securities that qualify for the ECB program,” said Antonio Fonseca, a trader at Probolsa in Lisbon who buys and sells non-investment grade Portuguese corporate bonds. “The appetite for these bonds is definitively there.”

On the euro region’s indebted periphery and a little over two years since it exited an international bailout program, Portugal is a bellwether for how far bonds might go this year. The nation remains Europe’s worst-performing sovereign market this year, even though it turned the corner over the past month with a rally wiping out losses.

Rate Halved

Semapa-Sociedade de Investimento e Gestao SGPS SA, which controls paper and pulp maker The Navigator Company SA and has no credit rating, sold 100 million euros ($112 million) of bonds in a private placement on June 2 as part of a plan to refinance its debt. The seven-year securities were priced to yield 2.68 percent. In March 2012, it paid 6.85 percent to borrow 300 million euros for three years.

Companies with a solid balance sheet can benefit from the ECB bond-buying program regardless of their rating, Chief Financial Officer Jose Miguel Paredes said this week by e-mail in response to questions. 

Mota-Engil, Portugal’s biggest construction company, is looking to lock in lower borrowing costs by taking advantage of the appetite for risk, a spokesman said. The company, which is also unrated, priced five-year bonds to yield 5.5 percent in 2014 and then 3.9 percent for securities of a similar maturity last year, data compiled by Bloomberg show. 

Retailer Sonae SGPS SA said it aims to lower the cost of its debt and increase the average maturity.

Buying Risk

ECB President Mario Draghi’s multi billion-euro corporate bond buying program, which began on June 8, is part of the central bank’s attempt to stoke inflation and lower financing costs across the euro area.

The purchases of investment-grade securities have sent the average yield for euro notes tumbling to a record 0.7 percent on Friday, according to a Bank of America Merrill Lynch index. Yet junk bonds have also rallied, with the average yield falling to 4.2 percent, the lowest in more than a year.

“Investors looking for yield, both institutional and retail, are being pushed into riskier debt such as sub-investment grade Portuguese debt,” said Nicholas Wall, a money manager in London at Old Mutual Global Investors, which oversees 27 billion pounds ($36 billion) of assets.

— With assistance by Neil Denslow, Selcuk Gokoluk, and Joao Lima

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