Investors are getting the least compensation for holding junk bonds instead of investment-grade debt in euros in more than six years.
The yield difference between speculative-grade notes and higher-rated securities narrowed to 2.9 percentage points from 4.8 percentage points a year earlier, Bank of America Merrill Lynch index data show. High-yield bond sales surged to a record 71 billion euros ($98 billion) in Europe this year, according to data compiled by Bloomberg.
“In some cases I’m not sure investors are being paid appropriately for the increased risk they’re taking going from investment grade to high yield,” said Henry Craik-White, a senior investment analyst at ECM Asset Management Ltd. in London, which oversees $8.6 billion in credit. “Investors are taking a bit more risk to get yield but the default rate is very low, which justifies that.”
Investors are piling into junk bonds as central bank stimulus and record-low interest rates push down yields. They’re also encouraged by defaults falling to historic lows, with the global rate at 2.8 percent at the end of October compared with a 30-year average of 4.7 percent, according to a report from Moody’s Investors Service last month.
Spanish car park operator Empark Aparcamientos y Servicios SA is the latest borrower to take advantage of demand for high-yield bonds. It sold 235 million euros of fixed-rate notes and 150 million euros of floating-rate securities to repay debt, according to data compiled by Bloomberg.
Empark’s six-year fixed-rate notes were priced to yield 6.75 percent while the six-year floating-rate bonds yield 550 basis points more than the three-month euro interbank offered rate, the data show. The Madrid-based company, rated B2 or five levels below investment grade by Moody’s, issued the notes through its Empark Funding SA unit.
PortAventura Entertainment Barcelona BV, a special purpose vehicle serving the Spanish theme park operator, is marketing 400 million euros of fixed- and floating-rate notes, according to a person familiar with the plan. The proceeds will be used to repay debt and will also be distributed to shareholders, the person said. Moody’s assigned the notes a provisional B3 rating, six levels below investment grade.
Empark and PortAventura are both selling bonds for the first time, according to data compiled by Bloomberg. Debut issuers raised 22 billion euros of debt this year, representing almost one third of all non-financial junk deals, the data show.
Also in the high-yield market today, U.S. chemical maker Huntsman Corp. (HUN:US) increased the size of its bond to 300 million euros from 200 million euros initially planned, according to a person with knowledge of the sale. The Salt Lake City-based company, rated Ba3 or three levels below investment grade at Moody’s, issued seven-year notes with a yield of 5.125 percent to repay part of its loans, the person said.
“High yield has had a good year and we expect this to continue,” Mark Burgess, chief investment officer at Threadneedle Asset Management Ltd. in London, said in a report today. “Company balance sheets are robust and we see defaults as very unlikely.”
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