Yield-hungry investors buy junk debt even as virus threatens Europe recovery
By Yoruk Bahceli
AMSTERDAM, Oct 19 (Reuters) - Investors snapped up bonds issued by some European companies vulnerable to the pandemic last week, even as a second wave of COVID-19 infections threatens to bring the summer economic rebound grinding to a halt.
As euro zone government bond yields hover near record lows thanks to central bank stimulus, investors have to look elsewhere for income.
Junk bonds remain an attractive option as corporate default rates are projected to be lower than thought at the start of the pandemic.
"Back at the heart of the COVID-19 crisis, no one would have imagined that the market would be ready this year to refinance names which once used to be looked on as default issuers," said Benjamin Sabahi, head of credit research at Spread Research, a specialist high yield research firm based in Lyon.
Last week, Rolls-Royce RR.L raised money to boost its balance sheet, while French shipping company CMA CGM and sugar producer Tereos refinanced upcoming debt maturities. Jaguar Land Rover raised a U.S. dollar bond.
Credit ratings agency Moody's said earlier in October that it expected leverage ratios for both Rolls-Royce and Jaguar of above 10 times next year, up from around five times in recent years for Rolls-Royce and around three times in 2018 for Jaguar, as both borrowers struggle to generate cash.
Moody's has both companies on negative outlooks, meaning they could be downgraded further. Nevertheless, they managed to raise more money from high yield investors than they initially planned. Rolls-Royce bonds was rated as investment grade before the pandemic.
Sabrina Jacobs, fixed income specialist at Insight Investment, which manages 736 billion pounds, said they were still moderately positive about the high-yield market, even after numerous European states imposed new restrictions to curb a second wave of the virus last week.
She cited the amount of support available from the European Central Bank and the resulting "hunt for yield".
All the companies, even CMA and Tereos, whose outlook has improved since the start of the pandemic, offered attractive premia on their outstanding bonds and ratings, analysts said.
"The details look good enough to hold these for the shorter-term, I would say - the concession, the yield, we do quite like them," Jacobs said, adding that the firm bought both the Rolls-Royce and Jaguar bonds.
Still, some reckon uncertainty over the impact of another round of coronavirus-related restrictions puts those bets at risk.
"Should the consensus assumption that a second hard lockdown of the economy can be avoided prove wrong, this would clearly introduce substantial setback potential," said Marco Stoeckle, head of corporate credit research at Commerzbank in Frankfurt.
(Reporting by Yoruk Bahceli; Editing by Hugh Lawson)
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