Bankers plot US risky-credit comeback as Europe left in the cold

THERE’S a hint of cautious optimism in the market for US junk bonds and leveraged loans these days. Bankers, bogged down by billions of dollars of buyout-financing commitments that have been stuck on their books for months, are testing demand for new deals once again. 

Across the Atlantic, however, it’s a different story.

As underwriters in New York look to offload debt tied to high-profile take privates including Citrix Systems and Nielsen Holdings, the European market remains all but shuttered. In fact, conditions are so lacklustre that syndicate desks are retooling deals for dollar-based investors just to find willing buyers. 

While both markets have been hampered by sky-high inflation and the prospect of rising interest rates, Russia’s invasion of Ukraine and the energy crisis that’s followed have left European money managers especially wary of adding new risk. That’s reflected in junk-bond spreads, which are a full percentage point higher in Europe than the US, and outstanding leveraged loan prices, which are almost 2 points lower. 

“The US credit market is more sheltered from the energy crisis than European companies, whereas recession risk is higher in Europe than in the US,” Lan Wu, an investment-grade portfolio manager at LGIM in Europe, said during a recent Q&A session with Bloomberg. “Euro spreads are pricing in more risks than US peers.” 

To be clear, market conditions are far from rosy in the US, either. Junk-bond yields have more than doubled this year, while bond and loan issuance are down more than 77 per cent and 55 per cent from a year ago. Banks are still holding about US$73 billion of underwritten financing on their balance sheets, according to a Sept 6 report from Deutsche Bank.

Still, bankers see enough investor demand to begin testing the waters, kicking off a roughly US$4.5 billion leveraged loan sale on Wednesday to help support the buyout of Citrix.

The US leveraged loan market, while seeing less volume, has been “orderly and open,” said Lauren Basmadjian, head of US loans and structured credit at Carlyle Group. That’s in part due to continued demand from collateralised loan obligation managers, she noted.

At the same time, US company fundamentals have been strong, despite a few negative surprises starting to emerge in second-quarter earnings, said Kevin Wolfson, portfolio manager for leveraged loans at Pinebridge Investments. 

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In contrast, surging energy prices in Europe as Russia squeezes natural gas exports are driving up input costs for businesses, denting earnings prospects and spurring recession concerns. 

As a result, European syndication desks are looking to US investors in an effort to offload funding commitments.

Barclays, which helped finance UK sports betting firm Flutter Entertainment’s takeover of Italian gambling operator Sisal back in December, is marketing a dollar-denominated 1 billion euro (S$1.4 billion) first-lien loan tied to the company, Bloomberg earlier reported.

And bankers that provided 6.6 billion euros to finance the merger of Orange and Masmovil Ibercom are shifting a 2 billion euro term loan to dollars to better reflect investor demand, according to people familiar with the transaction, who asked not to be identified as details of the financing are private.

“It is very unsurprising that banks are avoiding large-scale distributions in the European market given the currently limited liquidity, and are instead leaning more into the US right now,” said Ben Thompson, head of EMEA leveraged finance capital markets at JPMorgan. 

All eyes this week continue to be on the Citrix deal, seen as a bellwether for the US leveraged finance market. Should the bond and loan offerings prove successful, the split between the US and Europe could widen further, market watchers say.

Still, any further selloff in risky European credits may soon prove too good to pass up for bargain hunters.

“We are cautious on Europe, but I think that from a buying opportunity standpoint we will be looking to buy European credit risk into additional weakness, particularly at year-end,” Matthew Mish, head of credit strategy at UBS Group, said in an Aug 31 Bloomberg TV interview. BLOOMBERG