European junk-bond New Year sales surge may herald rush to risk – Reuters News2020-01-14
European junk-bond New Year sales surge may herald rush to risk – Reuters News
By Yoruk Bahceli
LONDON, Jan 14 (Reuters) – The market for junk-rated European bonds started 2020 with the best sales in the first two weeks in at least a decade, and rising demand for high-yield assets is seen as opening the doors for riskier borrowers.
Companies rated sub-investment grade — or junk in market parlance — have raised around 3 billion euros ($3.34 billion)since the start of the year. That’s the highest level ever for this period and more than double what was sold by this time in 2019, according to Refinitiv IFR data dating back to 2011.
Junk-grade issuers tapping the market in early 2020 included telecoms companies Altice ATCA.AS and Cellnex CLNX.MC, as well as new issuers like U.S. chemicals company Ashland ASH.
The junk surge should continue. Paris-based high-yield specialist Spread Research predicts issuance at around 110 billion euros in 2020, versus 75 billion euros or so last year.
Last year, the iBoxx euro liquid high-yield index IBLEH002 returned around 10%, according to Refinitiv. But holders of risk-free Bunds reaped almost 6%, so there was less reason to buy junk.
But with a Sino-U.S. trade deal all but done and economic growth stabilising, investors are willing to add more risk, said BofA’s head of credit strategy Barnaby Martin.
Some analysts expect Bund yields to rise this year from the current minus 0.2%, possibly to positive territory, amid signs of stabilising growth and the possibility of more government spending (Full Story).
« The (junk) rally last year was a very conservative one. It wasn’t people closing their eyes and buying the really risky stuff. To some extent, I think that changes this year, » Martin said.
Good news on trade and growth are « all you need for the high beta parts of the market to perform, » he added.
Investors are likely to head deeper into junk territory, Spread Research reckons. It predicts bonds rated B, at least four notches below investment grade, will return as much as 4.5% in the coming year, versus the 1% to 1.8% expected of those with a higher, BB score.
Investors became willing to buy riskier debt in primary markets late in 2019, as positive trade signals started pressuring safer assets. That allowed troubled companies such as French retailer Casino CASP.PA, Israeli drugmaker Teva TEVA.TA and Jaguar Land Rover to successfully tap markets.
More such deals should emerge in 2020.
« The market is wide open for everything from quasi-tricky single Bs to crossover names, » says Erin Brown, deputy head of EMEA high-yield and leveraged loan syndicate at BNP Paribas, referring to the highest-rated junk bond category that some conservative funds can also buy.
« If you missed a couple of the blow-ups you had a really good year. I think that’s going to be the case again this year … trying to avoid the landmines will be important because returns are expected to be lower than last year. »
($1 = 0.8991 euros)