Europe’s Junk-Bond Market Reopens at Costlier Levels for Issuers

(Bloomberg) -- The European junk bond market has opened again after the longest halt in over a decade, but at even costlier levels for issuers than they had expected.

Banks led by Barclays Plc and HSBC Holdings sold the first high-yield bond across the continent in 2-1/2 months last week, an 815 million-pound ($1.02 billion) deal backing Apollo Global Management's acquisition of Miller Homes Ltd. To do so, they had to step up pricing from initial talks and eventually offer the widest issue discount seen in years on the sterling tranche.

Miller Homes' expensive issuance shows that while junk-rated bonds might find a home in the current market, demand is thinning. That's as outflows from high-yield funds continue and investor appetite wanes amid inflationary pressures and fears of recession. Investors will only stomach these risks in exchange for clear compensation in price.

“It was important to reopen the European high-yield market after a prolonged quiet period with essentially no primary issuance,” said Oleksiy Soroka, a strategist at ING Bank. “It should pave the way for the new supply but clearly it will need to come at the right price to entice investors to step in.”

The Miller Homes debt deal, split into a sterling fixed tranche and a euro-denominated floating-rate one, represents two smaller corners of the European yield market, where the majority of the volume is made up by euro-denominated, fixed-rate bonds. Still, all signs indicate that for any high-yield issuer brave enough to come to the market in the weeks to come, it will not be smooth sailing.

Some can't afford to wait much longer, as banks have been sitting on the debt for months, with the cost of capital allocated to these deals weighing on the lenders' balance sheets. They include Wm Morrison Supermarkets Plc, as a part of its debt package is yet to be allocated.

An index tracking prices of high-yield bonds across Europe fell by 1.41% last week, its worst weekly performance since early February, and is now at the lowest in 18 months, according to data compiled by Bloomberg. The cost of insuring European junk bonds, a gauge for risk associated with them, neared its two-year peak on Tuesday.

On Tuesday, banks including BNP Paribas SA and Nomura Holdings Inc. came to the market with a 345 million-euro ($363 million) floating-rate note note backing Ardian SAS's acquisition of Italian drugmaker Biofarma SpA, completed early this year.

UniCredit last week slashed its yearly forecast for supply of high-yield corporate bonds, cutting it by half to between 50 to 60 billion euros.

Elsewhere in credit markets:

EMEA

Tennet Holding BV is leading Tuesday's primary market sales, with a four-part green offering. The deal will push the day's issuance tally to at least 4.58 billion euros, with covered bond deals from Berlin Hyp, SCBC and RLB Vorarlberg also in the market.

Russia's closely watched dollar payments on two bonds are trickling through to investors after the country dipped into its local holdings of the U.S. currency and sidestepped its first foreign default in a century
The U.K. should sell sustainability-linked bonds to show its commitment to net zero and do more to secure Britain's place as the global center of green finance, think-tank Social Market Foundation said in a report
The pace at which companies postponed financing plans is slowing as some reinstate deals shelved since Russia's invasion of Ukraine
Global sales of sustainability-linked loans continue to lag last year's record issuance as corporates steer away from new financing plans amid global inflation and Russia's war in Ukraine.

Asia

Little action is likely in Asia's debt markets this week, with a public holiday in Tokyo through Thursday and China also out today. Tuesday is also a public holiday in India, where investors are digesting the biggest monthly jump in top-rated corporate bond yields in more than a year.

Americas

Just five issuers braved a volatile Monday to price deals in the U.S. high-grade bond market, with eyes on Wednesday's looming FOMC decision. That's likely to prompt issuance to be focused in the early part of this week, as issuers seek to front-run what many believe to be a hawkish Fed statement.

The region's leveraged-loan market started the month with a leveraged-buyout loan for Therm-O-Disc, which will finance its LBO by an affiliate of One Rock Capital Partners