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 demand for Bank of Ireland bonds shifted because Ireland's credit outlook improved since the 2009 bailout. In 2009 the bank paid about 4.6% to sell $1.3bn of bonds; recently it returned with $650m of unsecured three‑year bonds paying 2.75%, and that deal was almost three times oversubscribed. Credit analysts, including Deutsche Bank's Christopher Whitman, say Ireland has recovered strongly and many credit investors are now comfortable with Irish risk.
A mix of strong investor demand and reduced bank lending is driving the boom. Standard & Poor's reports European companies — from multinationals like Siemens and Barclays to smaller firms — have issued more than US$430 billion of bonds this year. With banks cutting back to meet capital rules, firms are turning to bond markets to refinance maturing loans, often at lower rates.
When banks tightened credit, companies used bond issuance to replace short‑term bank financing and refinance maturing loans. The new bond funding often comes at reduced interest costs and has helped offset weaker sales caused by the financial crisis, giving struggling businesses access to capital they might not get from banks.
CoCos are complex debt instruments that pay bond‑like returns but are designed to convert into equity — or in some structures wipe out bondholders — if a bank's capital falls below a set threshold. Large European banks such as UBS and BBVA have issued CoCos this year to meet regulatory capital demands; analysts say banks have raised almost US$5 billion in these products so far.
European high‑yield issuance has picked up — Dealogic shows US$64.1 billion of high‑yield bonds issued this year — but average coupons have fallen to around 6%. That can still look attractive, but investors should weigh the lower yields against higher default and interest‑rate risk compared with investment‑grade debt.
Yes. The article highlights Bank of Ireland's $650m unsecured three‑year bonds at about 2.75% (nearly three times oversubscribed). It also cites Hellenic Petroleum, which raised $650m in four‑year bonds at an 8% annual return, and Portucel, which placed about $455m of seven‑year bonds at 5.4%.
Oversubscribed means investor demand exceeded the amount of bonds offered. High demand can push prices up and yields down, improving financing terms for issuers but reducing potential returns for new buyers. The Bank of Ireland deal was nearly three times oversubscribed, showing strong investor eagerness for that paper.
Analysts caution that strong demand has pushed investors into lower‑rated, non‑investment‑grade bonds with yields that may not fully compensate for risk. Critics such as Robin Doumar warn that if interest rates rise, investors could suffer from both higher interest‑rate exposure and credit deterioration — a scenario he says could leave investors badly hurt.
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