European junk bond sales hit record as investors cut US exposure

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favorite tales on this weekly e-newsletter.Gross sales of dangerous European company debt surged to their highest ever degree in June, as lowly rated corporations reap the benefits of a capital flight out of US markets on fears over the fallout from President Donald Trump’s commerce tariffs.Issuance by high-yield, or junk-rated, corporations — lots of which have beforehand struggled to entry the market — rose to about €23bn in June, in accordance with JPMorgan knowledge. That beats the earlier month-to-month report, set in June 2021, by roughly €5bn. June additionally noticed the best variety of offers on report at 44, in accordance with PitchBook knowledge.“The market is drowning in new offers,” mentioned an investor at a European credit score hedge fund.Junk-rated corporations are responding to a fall in borrowing prices attributable to higher demand from buyers, lots of whom are shifting allocations away from US property attributable to Trump’s erratic commerce coverage and considerations concerning the authorities’s large borrowing wants. Though the US inventory market has rebounded strongly within the second quarter, a broad shift away from greenback bond markets has continued, serving to drive the buck to its weakest begin to the yr in additional than half a century. European high-yield bond funds, in the meantime, have posted seven straight weeks of inflows, in accordance with Financial institution of America knowledge.Such has been the demand in Europe that corporations together with bullets producer Czechoslovak Group and butter-substitute maker Flora prior to now week have been capable of faucet bond markets that beforehand proved tough to entry.“There’s a large amount of money to be invested . . . It’s the type of market the place persons are wanting on the artwork of the potential,” mentioned Ben Thompson, head of Emea leveraged finance capital markets at JPMorgan.KKR-owned Flora’s deal marked the primary by a triple C-rated issuer — one of many lowest bands within the credit score spectrum — in nearly a yr. Investor demand for riskier credit meant it was additionally capable of subject the bonds below Norwegian regulation, a regime that has historically been lighter on disclosures and protections than another western markets.Flora priced €400mn of bonds on Monday at a yield of 8.625 per cent, roughly 4 share factors decrease than different excellent debt with an identical score, and after the corporate needed to pull one other bond deal final yr.Prague-based CSG was capable of value new five-year greenback and euro debt at yields of 6.5 per cent and 5.25 per cent respectively final week. That marks a dramatic decline in borrowing prices since its most up-to-date financing, a $775mn bond in November that the Monetary Occasions reported was offered to personal credit score companies at an rate of interest of greater than 11 per cent.Additionally out there providing new euro-denominated debt to buyers is junk-rated Carnival, the world’s largest cruise operator, which prior to now few years was compelled to cost offers secured on its cruise ships at double-digit rates of interest. Excessive yield spreads — the additional yield over authorities debt that dangerous debtors should pay — have dropped from greater than 4 share factors in April to three.1 share factors on the finish of June, in accordance with Ice BofA knowledge. “You may print fairly excessive danger stuff at very enticing charges in the mean time. The market is working crimson scorching,” mentioned one high-yield bond investor. “There are inflows coming into our market as folks wish to diversify away from the US.”President Trump’s commerce insurance policies have prompted many massive buyers to rethink their overwhelming desire for the US, given the higher degree of uncertainty.“There’s an enormous quantity of capital flowing into the asset class . . . and we’re beginning to see bigger managers focus extra on Europe,” mentioned Thompson. Issuers with troubled pasts, or these providing advanced and subordinated devices corresponding to payment-in-kind bonds — the place curiosity might be rolled up into the principal to be repaid on maturity — have additionally been eagerly welcomed by buyers with massive quantities of money to deploy.Footwear large Skechers final week priced €1bn of bonds, alongside one other $2.2bn of bonds that included a payment-in-kind characteristic, with the euro portion being elevated from an preliminary providing measurement of €750mn.“Managers are determined to take a position,” mentioned one leveraged finance banker.