Junk Bonds Gain Favor as European Banks Reduce Lending 

Bruce Mackenzie and Toby Ali were young bankers in the late 1990s, traversing Europe to pitch the merits of high-yield securities, otherwise known as junk bonds, to chief executives. The corporate chieftains mostly said no.
Europe’s skepticism has since waned.

For many companies on the Continent, the high-yield junk bond market has become essential for raising money now that their local banks are making fewer corporate loans.

While junk bonds have been an established part of corporate finance in the United States for the last three decades, the market in Europe has caught fire only in recent years.

Greek banks, Spanish construction companies and recently insolvent German wood manufacturers are tapping the market, alongside other European banks such as Banco Popolare in Italy and fallen angels — investment-grade companies that have been downgraded to junk — like Fiat and Nokia.

“The U.S. was significantly ahead of Europe in terms of its reliance on capital markets rather than bank-orientated funding,” said Ray Doody, head of acquisition leveraged finance in Europe, the Middle East and Africa at JPMorgan Chase. “This gap is now being closed rapidly.”

That trend has coincided with a boom in mergers and acquisitions, driven in part by private equity firms selling companies they bought before the crisis, and some buyers financing those deals, as is typical, in the leveraged finance market.

“If you have been a high-yield investor in Europe, you have done very well,” said Alberto Gallo, chief macro strategist at Royal Bank of Scotland. “The question is whether it continues.”

European leveraged finance investors used to shun loans and bonds without standard protections. Now they are lining up for them, a sign that investors are stretching to secure higher returns.

“We are starting to see much more aggressive transactions being structured in the European leveraged finance market that are reminiscent of some of the excesses of the 2006-2007 boom period,” said a recent report from Standard & Poor’s.

 

Source: NYT

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