Bonds of Firm That Sells $500 Sneakers Sum Up Junk’s Dilemma
2021-05-25 10:04:37.944 GMT

By Laura Benitez
(Bloomberg) — It’s a deal that has come to exemplify the
fevered state of the high-yield bond market.
Italian luxury fashion retailer Golden Goose — famed for
its distressed-look shoes — drew enough interest to sell a 480
million-euro ($588 million) six-year junk bond this month.
Unlike any other deal in Europe this year, this one banks on the
company’s ability to sell sneakers that retail at around 400
euros, its flagship product.
One attractive aspect of the deal was that it yielded more
than a percentage point above the average for similarly-rated
credits, partly due to it being the firm’s first bond sale.
Investors struggling to make decent returns found the yields of
over 5% on the single B-rated bonds irresistible. Golden Goose
declined to comment when contacted by Bloomberg News.
Benoit Soler, a senior portfolio manager at Keren Finance
in Paris, didn’t go for it. Barring significant wage increases,
he’s skeptical about the prospects for high-end retail, noting
that there’s unlikely to be a serious rise in spending on non-
essential goods.
“For Golden Goose, you’re buying into a non-essential mono
product and taking a view on that sector for the next six years,
if you buy the deal to hold,” he said.
The offering has come to manifest the risks investors are
willing to take to book returns, especially after global
monetary policy helped swell the pile of negative yielding debt
to a record. And even amid rising concerns over inflation, junk
notes continue to advance because their higher yields and
typically shorter maturities offer protection against price
rises.
Bloomberg Barclays index that tracks European junk bonds
climbed about 2% this year, while a similar gauge of investment
grade notes fell 1.2%. The difference in yields plummeted around
500 basis points since March 2020 to almost 2 percentage points.
Read More: Bond Investors Take Ever-Riskier Bets in Hunt
for Returns
“The market is way too hot, and bond terms are the worst
I’ve seen my entire 20-year career,” Soler said. “If spreads on
assets like junk bonds are at their lowest at the same time as
typically safe-haven assets such as government debt, it’s a sign
of trouble brewing.”
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Spending Spree

Others are also becoming cautious. Hedge funds’ short
position on junk bonds this month was the highest since 2008,
but that hasn’t curbed the rush of debt sales. Issuance in junk
debt is at a record this year, and offerings have still been
oversubscribed multiple times over
“While the quantity of deals has been increasing, the
quality has been gradually decreasing throughout the year,”
Azhar Hussain, head of global credit at Royal London Asset
Management, said in an interview. “There’s no obvious catalyst
at the moment to really instill the caution that’s needed longer
term.”
There’s been talk of so-called revenge spending — the act
of splurging on goods and services to compensate for a difficult
year — benefiting the sector as economies emerge from
lockdowns. IHS Markit’s measure of U.K. private-sector growth
this month hit the highest since the index began in 1998.
The luxury retail sector, however, wasn’t as impacted by
lockdowns because the pandemic didn’t curb the incomes of high
earners as much, explained Solweig Pierronnet, a senior credit
analyst at Spread Research in Lyon, France. In other words, the
pent-up demand for high-end goods may be limited.[…]