It will be difficult to escape the high yield. Most investors and bankers with whom I spoke have complained that QE could create even more extreme conditions in the coming months.
Since the beginning of March, several companies have issued bonds that allow them to cut more than 500 basis points in interest costs. Experts believe that this is the new normal.
Campofrío sold €500 million in bonds at 3.375% on March 3 to get rid of its main high yield bond, launched in 2009, for which the firm was paying 8.25%.
Participants at the Euromoney Conference on High Yield Bonds ran out of superlatives to describe the effect of what the chief economist of one bank called “root change” in a market demand “we have never seen before.”
Campofrío was not alone in the early weeks of March. German Unitymedia KabelBW sold €700 million in 12-year bonds at 3.75%, in exchange for a bond that paid more than 9% interest.
“This can only be explained as part of the effect that QE is having on markets,” said an economist who wished to remain anonymous. “We see squeezing profitability and investors chasing the bonds of the most popular firms as though the end of the world was rapidly approaching.”
“QE is clearly having a significant impact,” admitted the head of high performance at a major British bank. “Although it was expected, the change is dramatic, and there has been a lot in just a few weeks. Investors are pouring money into high yield. Geopolitical concerns are being put aside and the cost of protection is evaporating as we speak. ”
“This is just the beginning,” said another senior high yield French. “In a couple of months, which is the time that an issuer needs more or less for putting together the documentation to reach the market, there will be hordes of companies taking advantage of the current liquidity euphoria.”
“There is a very optimistic atmosphere in Europe,” said a third banker. “Credit quality is improving, maturities are a bankable market, and falling oil prices favour a lot of sector industries. With this picture, I feel very comfortable. “
A US investor with about 3 billion assets under management and who participates in the European high yield market said the announcement of QE had taken the markets by surprise:
“The reaction to QE has been incredible,” she said. “High yield should be treated as a strategic position at the same time as we should look for diversification. But investors are not just going for tactical opportunities, the search for yields seems unstoppable. “
The same investor also issued a word of caution:
“This market benefits issuers, and I’m not talking about improving their debt profiles” he said, suggesting that investors face additional risks due to the distortion caused by QE even before it is implemented. “Some corporations have weak balance sheets, and come to the table with aggressive bonds that most investors would have rejected a few months ago.”
Bankers deny that QE is opening the door for an era of excess:
“We know that we must find the right balance, not to abuse too much of such a liquid market,” said the first banker.
According to figures compiled by Dealogic, a financial data firm, the high yield market has already sold €25 million in bonds, €2bn more than in the same period last year:
“It used to be easier for investors and banks to ignore the European market,” said a German banker. “That has radically changed.”