Crisis Erodes 75% Junk Bond Gains as Losses Spread: Euro Credit
July 20, 2011, 4:57 AM EDTBy Ben Martin
July 20 (Bloomberg) -- Junk corporate bonds are turning into a losing bet in Europe as surging sovereign yields infect assets that just 18 months ago were handing investors returns of more than 75 percent.
Speculative-grade bonds have lost 1.1 percent on average this month, adding to the 1.6 percent investors forfeited in June, according to Bank of America Merrill Lynch data. They’re being beaten by German bunds, commodities and investment-grade company notes, while stocks are still proving a bigger casualty of the euro-region crisis.
“There’s so much uncertainty about the future of the euro project,” said Marchel Alexandrovich, a London-based economist at Jefferies International Ltd., a unit of the U.S. investment bank. “No one knows what tomorrow will bring.”
Investors are shunning all but the safest securities as European Union leaders prepare to meet tomorrow to address the sovereign crisis that has propelled Italian and Spanish bond yields to euro-era records. German Chancellor Angela Merkel said yesterday the situation can’t be fixed “in one step.” Confidence in high-yield notes is also withering as government budget cuts hamper economic growth in the region, hurting companies’ ability to pay debt.
Junk bonds returned a record 76.4 percent, including reinvested interest in 2009, and 14.7 percent last year, according to Bank of America Merrill Lynch’s Euro High-Yield Constrained index of 297 bonds issued by companies such as Fiat SpA and Continental AG. The debt gained 4.1 percent in the first quarter of this year and just 0.7 percent in the second.
Relative Performance
Junk bonds, rated below Baa3 by Moody’s Investors Service and BBB- by Standard & Poor’s, lost money this month as benchmark German government debt returned 2.4 percent, and investment-grade corporate securities earned 0.6 percent, Bank of America index data shows. Investors made more by holding commodities, with the Standard & Poor’s GSCI Spot Index increasing 3.9 percent in July. Stocks were a worse bet, with the Stoxx Europe 600 index losing 3.1 percent.
“Given that high yield is a riskier asset class, the debt crisis and associated economic concerns have a greater impact than on investment-grade bonds,” said Vasant Mehta, a credit strategist at Royal Bank of Scotland Group Plc in London.
Speculative-grade companies’ borrowing costs have surged this month. The extra yield investors demand to hold junk bonds rather than government debt widened 71 basis points, or 0.71 percentage point, to a seven-month high of 641 on July 18.
Ono, Fiat
Grupo Corporativo Ono SA debt lost 4.8 percent this month, more than the bonds of any non-financial issuer in Bank of America’s high-yield index. Investors are penalizing the Madrid- based cable television operator because it operates solely within Spain, said an Ono official who declined to be identified citing company policy.
Turin, Italy-based Fiat’s bonds lost 2.1 percent, while the debt of Europcar Groupe SA, Europe’s biggest car rental company, shed 3.8 percent, the index shows. A Fiat official who wouldn’t be named declined to comment. Europcar Chief Financial Officer Charles Desmartis didn’t respond to phone messages and e-mailed questions.
“We have been looking at some Italian names lately to potentially add to them, and we have been doing a little bit here and there,” said Chris Brils, co-head of global high-yield at F&C Management Ltd., which oversees almost 1 billion euros ($1.4 billion) of junk-rated assets. He wasn’t more specific. “Still, we’re very cautious for the reason that more likely than not the sovereign crisis will escalate again.”
European manufacturing expanded at the weakest pace in almost two years in June, according to London-based Markit Economics, while European Commission data show confidence in the economic outlook dropped to the lowest in eight months.
IMF’s Outlook
The International Monetary Fund said last week that further delays in resolving the Greek debt turmoil risked jeopardizing global economic growth.
Fitch Ratings downgraded Greece by three levels to the lowest grade for any country last week, following Moody’s and S&P and saying a default is a “real possibility.” Portugal, which like Greece and Ireland has sought an international bailout, was cut four levels to junk status by Moody’s earlier this month.
At the same time, the corporate default rate in Europe declined to 1.4 percent in the second quarter from 5.6 percent a year earlier, and will probably stay low for the rest of 2011, Moody’s said on July 14.
The volatile market conditions deterred junk-rated issuers from selling securities, with sales falling 65 percent to 2.7 billion euros in June from the previous month, according to data compiled by Bloomberg. Issuance totaled a record 31.8 billion euros in the first six months.
--With assistance from Katie Linsell in London. Editors: Andrew Reierson, Paul Armstrong
To contact the reporter on this story: Ben Martin in London at bmartin38@bloomberg.net.
To contact the editor responsible for this story: Paul Armstrong at Parmstrong10@bloomberg.net.
