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Investors’ hunger for yield has turned bond markets upside down. In a sharp turnround, some companies in the crisis-hit “periphery” of Europe are now able to borrow more cheaply than companies in the “core”.
This remarkable shift is captured in data from JPMorgan Asset Management, which shows high-yield bonds issued by companies in the periphery have been trading on lower yields, which move inversely to prices, than similar debt sold by companies in northern European countries.
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The reversal in sentiment towards the sub-investment grade debt issued by companies from Italy, Spain, Portugal, Greece and Ireland is striking. Less than two years ago, at the height of the eurozone debt crisis, such companies were paying yields 4 percentage points higher than the equivalent in the core.
Many market observers do not expect this to persist. But the fact that it has happened underlines the huge appetite for peripheral European debt among high-yield investors who have become wary of emerging markets.
“The euro area periphery has recently been cast as a relative safe haven for investors looking to reduce exposure to emerging markets risks,” says Chetan Modi, head of European leveraged finance with Moody’s.
“The high-yield corporate market has become crowded with buyers, with not much issuance for some time,” says Christine Johnson, head of fixed income at Old Mutual Global Investors.
“Those with paper outstanding will be some of the best surviving companies, so if you can get over their Italian-ness or Spanishness, they offer attractive returns.”
Banks appear to be among the main beneficiaries. Spain’s Banco de Sabadell issued a $810m bond in November with a yield of just 2.58 per cent, Bank of Ireland raised $1bn in January at 3.34 per cent and Italy’s Unipol Gruppo Finanziario raised $566m last month at 3.06 per cent.
Of course, some countries from the “periphery” are not that peripheral. Fiat, the motor group based in Italy but dependent on the global economy, was last year the biggest issuer of high-yield bonds from the periphery, raising more than $9bn. It was back in the market last week, raising $1.4bn at 4.75 per cent.
The European high-yield market has also benefited from the desire of US investment fund managers to rebuild their exposure to the region’s companies as concerns over the eurozone crisis have receded.
Bank of America Merrill Lynch says that last week saw inflows of $903m into European high-yield credit funds, compared with $517m going into European investment grade funds, while leveraged loans saw outflows of $14m.
A senior banker says: “It could be some fund managers who might prefer German bonds have been mandated to buy only European peripheral bonds, so they have to choose between doing that and staying in cash – and cash stinks in the current environment because it offers such a low return.”
With European high yield bonds offering yields of about 3.8 per cent, Peter Aspbury at JPMorgan Asset Management, concedes there is a debate about what is really high yield. “Against that, default rates remain low – so investors are being well compensated at a time when the yield on five-year Bunds is 0.699 per cent.”
The growth in issuance has been supported by the stabilisation of credit across Europe, says Moody’s. Negative rating outlooks on corporates in the euro area periphery fell to 22 per cent at the end of last year, from 63 per cent at the start of the year.
High-yield corporate issuance from the periphery last year doubled to $24bn and increased to 27 per cent of total issuance from the European Union – up from 18 per cent in 2012, according to Moody’s.
One reason participants are confident the peripheral high-yield market will remain strong is that most of last year’s bond proceeds were used for refinancing. With banks under pressure to shrink their lending to repair balance sheets, more companies are likely to the high-yield market for funding rather than banks.
But the drop of yields from companies in the European periphery towards those in the core will be limited by the fact that government debt still tends to act as benchmark for the bond market and – even after the recent compression in yields – interest rates for sovereign debt are lower in the core than in the periphery.
Ms Johnson says the narrowing of peripheral yields over those of core countries will not last. “If the present situation continues, there will more supply and the situation will normalise,” she says. “There is a host of companies from the periphery who have been locked out for three to to four years.”
