Buyers' risk appetite back as Europe alters debt menu
In September 2009, the Irish lender, which received a €4.8 billion bailout during the financial crisis, was forced to offer investors a return of about 4.6 per cent to sell $US1.3 billion of 3½-year bonds.
Yet when the bank returned to the European corporate bond market last week, the yield had almost halved, to 2.75 per cent, on its $US650 million of unsecured three-year bonds. More important, the issuance was almost three times oversubscribed, as investors clamoured to secure access to the relatively risky bonds.
"Ireland has recovered strongly in the past couple of years," Deutsche Bank's Christopher Whitman said. "Many credit investors are now comfortable with Ireland."
The demand for Bank of Ireland bonds is the latest example of the credit boom gripping Europe.
Despite concerns about the Continent's wider economy, companies including multinationals like Siemens and Barclays as well as smaller firms have issued more than $US430 billion ($446 billion) of bonds this year, Standard & Poor's says. US firms have pocketed about $US380 billion.
The bonanza has eased the short-term financing troubles for many of Europe's struggling companies.
With banks cutting back on lending to meet more stringent capital requirements, the debt markets have given companies an opportunity to refinance maturing loans, often at reduced interest rates. The new financing has also helped offset the impact of dwindling sales caused by the financial crisis.
Even in debt-ridden European countries like Greece and Portugal, companies have found willing bondholders to back new issuances.
The Greek oil-refining company Hellenic Petroleum, for example, raised $US650 million in four-year bonds on April 30, after it offered investors an annual return of 8 per cent.
Portucel, a Portuguese paper manufacturer, also won backing in mid-May for its seven-year bonds, worth a combined $US455 million at 5.4 per cent.
In total, European companies have issued $US64.1 billion of high-yield bonds this year, almost double last year's amount, according to the data provider Dealogic.
Europe's banking sector has also got into the financing act.
Faced with regulatory demands to increase reserves, a number of large European financial institutions, including UBS of Switzerland and BBVA of Spain, have issued so-called contingent capital, or CoCos, to fill the void.
These complex instruments offer bond-like returns but convert to equity - or, in some cases, wipe out bondholders altogether - if a bank's capital falls below a certain threshold. European banks have raised almost $US5 billion through these products this year, and analysts expect more by the year end.
"CoCos are an attractive option for some of Europe's largest banks," said James Longsdon, at Fitch Ratings.
But while Europe's corporate sector has benefited from the near record amount of bond issuances so far this year, analysts worry investors may be setting themselves up for trouble.
As demand for corporate bonds has outstripped supply, many investors are now looking to buy debt from non-investment grade companies in the high yield market.
These companies once had to guarantee double-digit returns to entice investors to part with their money. Now, the average coupon, or return, on offer in the European high-yield market has fallen to about 6 per cent.
For some, that still represents a healthy return. But other investors worry the falling yields do not compensate for the dangers associated with backing these somewhat risky companies.
"Investors will get absolutely shellacked," said Robin Doumar, of Park Square Capital. "As rates rise, investors will get savaged by both interest rate and credit risk. This will end in tears."
Frequently Asked Questions about this Article…
Investor appetite has returned as yields on Bank of Ireland bonds fell sharply — from about 4.6% in 2009 to roughly 2.75% on a recent three‑year unsecured issue — and the latest $US650 million deal was almost three times oversubscribed. Market commentary points to Ireland's strong recovery and growing investor comfort with Irish credit as reasons for renewed demand.
The European corporate bond boom — more than $US430 billion of corporate bonds issued this year according to S&P — means companies have been able to refinance maturing loans and ease short‑term funding pressures as banks cut back lending. For investors this has created more supply of corporate debt and opportunities to earn income, but it also coincides with changing risk dynamics across Europe.
Yes. Even companies in debt‑hit countries have found willing bondholders. The article notes Hellenic Petroleum raised $US650 million in four‑year bonds at an 8% yield, and Portuguese paper maker Portucel placed about $US455 million of seven‑year bonds at 5.4%, showing investors are still backing some issuances in those markets.
CoCos, or contingent capital instruments, are complex securities that pay bond‑like returns but convert into equity — or can wipe out bondholders — if a bank's capital falls below a set threshold. The article says large European banks including UBS and BBVA have issued CoCos to meet regulatory capital requirements, and European banks have raised almost $US5 billion in these products this year.
Rising demand has pushed more investors into the high‑yield market and driven coupon rates lower. Dealogic data cited in the article shows European high‑yield issuance of $US64.1 billion so far — nearly double last year — and the average coupon in the European high‑yield market has fallen to about 6%, down from the double‑digit returns previously needed to attract buyers.
The article highlights two main risks: credit risk (the chance a risky company defaults) and interest rate risk. Some analysts warn that as interest rates rise, investors in lower‑yielding, non‑investment‑grade bonds could be hit by both falling bond prices and worsening credit conditions, potentially magnifying losses.
Stricter capital requirements have led banks to cut back on traditional lending, which pushed companies into debt markets to refinance maturing loans. At the same time, banks themselves have issued contingent capital (CoCos) to boost reserves. Both trends have increased overall bond issuance in Europe this year.
Oversubscription signals strong demand, but falling yields mean investors are getting less compensation for taking credit risk. Analysts quoted in the article warn this could indicate increased risk‑taking that may not be fully rewarded if conditions change. For everyday investors, it’s a reminder to weigh demand‑driven price moves against the underlying credit quality and interest‑rate risks.
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