September 2, 2019 / 3:28 PM / a month ago

Positive yields ahoy! Investors hoover up European junk bond issues

* Smurfit Kappa achieves one of lowest yields ever at 1.5%

* Thyssenkrupp deal 2.7 times covered despite ratings woes

* Deals set down marker for rest of September window

By Abhinav Ramnarayan

LONDON, Sept 2 (Reuters) - Junk-rated firms Smurfit Kappa and Thyssenkrupp were overwhelmed with demand when they kicked off post-summer proceedings for the European high-yield market on Monday, as yield-starved investors piled into the new issues.

With much of the European bond market now in negative-yielding territory, investors are being forced down the credit spectrum - allowing the likes of Smurfit Kappa and Thyssenkrupp to price deals at levels rarely seen before.

Packaging firm Smurfit Kappa caught the eye with its plans to sell 750 million euros ($835.80 million) of eight-year bonds at 1.5%, some of the lowest yields clocked in the European junk bond market for a new issue, particularly for one of such a long maturity.

The company was able to achieve this on the back of a 3.9 billion euro order book - allowing it to upsize from the original 500 million euro target.

Germany’s Thyssenkrupp was set to raise 1 billion euros from the sale of a 3.5-year bond issue at an expected yield of around 2%, with orders exceeding 2.75 billion euros at one stage, according to leads.

Investors have been forced down the credit spectrum in the past few months as expectations of a European Central Bank rate cuts and asset purchases have pushed a large chunk of the European bond market into negative-yielding territory.

More than a third of European investment-grade debt is negative yielding, according to Tradeweb, driving the market towards the more speculative assets such as junk-rated bonds.

“For those who are watching this market closely, these levels won’t come as a surprise because we have seen how this market is trading,” said one banker who is managing the Thyssenkrupp trade, preferring to remain anonymous as he is not allowed to speak publicly about his clients.

“But certainly it sets down a marker for September, and it will be interesting to see what happens when you move from the crossover names to the lower-rated ones,” he added.

Smurfitt Kappa — BB+ from S&P Global and Fitch — and Thyssenkrupp — BB- from S&P Global and BB+ from Fitch — both fall into the “crossover” area, a term used to describe companies that are on either side of line that divides investment grade from junk.

Still, the kind of yield being achieved is raising a few eyebrows.

“Some high yield managers will be buying this debt as part of their strategy, but generally speaking a lot of other investors are just forced into this because of the paucity of options,” said Colin Hart, a portfolio manager and head of research on the multi-asset team at BNP Paribas Asset Management. He was referring to the vast quantities of European debt that is yielding below zero in the investment-grade category.

“A lot of people are buying this on a short-term view that yields could go even lower. The longer-term, wider debate about how long it can last is only just starting,” he said.

Other European high-yield issuers have sold bonds at similar yields to Smurfit Kappa, but not usually for quite such a long maturity.

Salini Impregilo sold a seven-year 500 million euro bond at 1.75% in September 2017 at the height of the ECB’s corporate bond purchase programme. Although the ECB did not buy junk debt, its purchases of investment-grade bonds pushed other investors into the high-yield market.

More recently, Germany’s Adler sold a 400 million euro three-year bond at 1.5% and France’s Fnac Darty a five-year bond callable after two years at 1.875%. ,

In the case of Thyssenkrupp, observers said the bond deal came at a significant discount to the industrial firm’s outstanding bonds.

This is still an achievement given how much pressure the company has been under from ratings agencies recently as it looks to shed some of its prized assets to bolster some of its remaining businesses. ($1 = 0.8973 euros) (Reporting by Abhinav Ramnarayan, additional reporting by Yoruk Bahceli. Editing by Jane Merriman)

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