Europe HY turning worryingly eccentric
Central bank money is flooding into bonds, making the European high yield market a bizarre place where a double-B rated issuer can pay a coupons of less than 1%. That is attracting first-time issuers with risky, opaque businesses who are getting away with offering scant investor protection.
Only a few deals this autumn have struggled. Euro high yield issuers have rarely had it this easy. October's issuance volumes were the highest in two years — beating the same period last year five times over, according to Moody’s.
Packaging company Crown holds the record for the lowest coupon ever for a junk-rated bond with 0.75% for its 2023 senior notes sold in October.
Now Czech gambling business Sazka and Greek mining-energy-infrastructure conglomerate Mytilineos have made their debuts this month in the euro, supported by big international banks such as JP Morgan, HSBC, Credit Suisse and Citigroup. Highly levered Swedish ventilation company Assemblin looks to soon complete a debut bond, too — the proceeds partially used to pay a dividend to sponsor Triton.
But syndicate bankers keep talking about bifurcation with new issuer hopefuls being grouped into haves and have-nots. Those from the auto sector, retail, construction, chemicals and other cyclical industries are supposed to be feeling left out.
Yet car parts supplier Faurecia just issued €700m of 2.375% 2027 senior notes. Embattled Jaguar Land Rover completed a €500m issue of 2024 notes paying 5.875%, even though the notes came with exceptionally weak covenants. Even Teva, the US-Israeli pharma giant that could still face huge liabilities related to the opioid crisis, managed to tap the euro market paying just 6%.
The dash for yield is on. But the worry is that investors are chasing so hard, they are taking far greater risk than they are being compensated for.