European junk bond markets reopened this week after a summer time shutdown, as Italy’s greatest playing firm borrowed €350mn with the promise of a hefty payday to nervous traders.
September is often a bumper month for brand new offers, as merchants return from the summer time lull, however it has taken a number of weeks for the primary main deal to hit the market, as rampant inflation and Europe’s darkening financial outlook have sapped demand for dangerous belongings.
On Thursday, Lottomatica, Italy’s main betting and gaming firm, tempted specialist bond traders again via a five-year bond with a 9.75 per cent rate of interest. At the beginning of this 12 months, the Ice BofA index of European high-yield — a tough proxy for common borrowing prices — stood as little as 2.8 per cent.
This deal underlines how the surroundings has modified. Volatility in bonds has stored companies away from markets all through 2022, with a number of issuers cancelling offers within the first half of the 12 months. However the transaction additionally exhibits some corporations are ready to “chew the bullet” of excessive costs when they should increase debt, one portfolio supervisor mentioned.
“There’s a component of warning we’re seeing. Not everybody and anybody will be capable to worth on this surroundings,” mentioned Amarveer Singh, an analyst on European gaming at CreditSights.
The deal from the corporate, which is owned by personal fairness large Apollo, attracted triple the quantity of funding required by the corporate, and supplies Lottomatica with funds that might be ringfenced for brand new acquisitions.
Demand was sturdy sufficient for bankers on the deal to have the ability to decrease the unique proposed coupon of 10 per cent and ditch a difficulty low cost. Nonetheless, curiosity funds to traders are far above the quantity provided by corporations of Lottomatica’s dimension in recent times, when low rates of interest and assist for the market from the European Central Financial institution stored borrowing prices low.
Returns on high-yield European debt have dropped 23 per cent this 12 months as traders have pulled out of riskier belongings. However a scarcity of latest offers has additionally led to pent-up demand, with portfolio managers ready for alternatives to spend money.
Higher-than-expected inflation data from the US this week, which hit benchmark authorities bond costs, additionally added to traders’ uncertainty.
“Traders discover it difficult to cost threat on this surroundings. The market has been extraordinarily unstable — even via the advertising stage we needed to cope with the influence following US [consumer price index data],” mentioned Stephen Smith, co-head of world leveraged finance syndicate at Barclays, which was a lead bookrunner on the cope with Deutsche Financial institution.
A number of traders had been shocked that Lottomatica was the primary issuer after summer time, as many portfolios exclude playing as an funding alternative on sustainability grounds. Some had been cautious of Apollo’s earlier strikes to extract cash from Lottomatica, a enterprise it acquired in 2021 and has already piled with debt to successfully recoup its funding. Apollo declined to remark.
“Apollo-backed Italian gaming shouldn’t be the simplest credit score to get snug with,” mentioned Mark Benbow, a portfolio supervisor in high-yield debt at Aegon Asset Administration, however added: “We performed it and prefer it lots.”
The dearth of offers to this point in September has additionally led traders to rein in expectations of a busy “again to highschool” interval. “We had been advised €3bn of provide [was] coming in [high-yield] for September. [That] doesn’t look doubtless anymore,” mentioned Benbow.