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 buyers.
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 property.
On Thursday, Lottomatica, Italy’s main betting and gaming firm, tempted specialist bond buyers again via a five-year bond with a 9.75 per cent rate of interest. At first 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 atmosphere has modified. Volatility in bonds has saved 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 reveals some firms are ready to “chew the bullet” of excessive costs when they should elevate debt, one portfolio supervisor stated.
“There’s a component of warning we’re seeing. Not everybody and anybody will be capable to worth on this atmosphere,” stated Amarveer Singh, an analyst on European gaming at CreditSights.
The deal from the corporate, which is owned by non-public fairness big Apollo, attracted triple the quantity of funding required by the corporate, and gives Lottomatica with funds that might be ringfenced for brand new acquisitions.
Demand was robust sufficient for bankers on the deal to have the ability to decrease the unique proposed coupon of 10 per cent and ditch a problem low cost. Nonetheless, curiosity funds to buyers are far above the quantity supplied by firms of Lottomatica’s dimension lately, when low rates of interest and help for the market from the European Central Financial institution saved borrowing prices low.
Returns on high-yield European debt have dropped 23 per cent this 12 months as buyers have pulled out of riskier property. However a scarcity of latest offers has additionally led to pent-up demand, with portfolio managers ready for alternatives to spend money.
Larger-than-expected inflation knowledge from the US this week, which hit benchmark authorities bond costs, additionally added to buyers’ uncertainty.
“Buyers discover it difficult to cost threat on this atmosphere. The market has been extraordinarily unstable — even via the advertising and marketing stage we needed to cope with the affect following US [consumer price index data],” stated 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 buyers 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 isn’t the best credit score to get comfy with,” stated Mark Benbow, a portfolio supervisor in high-yield debt at Aegon Asset Administration, however added: “We performed it and prefer it rather a lot.”
The dearth of offers thus far in September has additionally led buyers to rein in expectations of a busy “again to high school” interval. “We had been informed €3bn of provide [was] coming in [high-yield] for September. [That] doesn’t look possible anymore,” stated Benbow.